Capital imbalance forces junior oil and gas players to get creative

3 February 2014

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Monday 3 February 2014: Capital constraints are forcing junior oil and gas companies to consider more creative funding options, according to EY research.

The firm’s Oil and Gas Eye Index – which monitors the performance of the sector’s AIM-listed companies – fell 6% during 2013, a decrease Jon Clark, oil and gas transactions partner at EY attributed to individual companies’ drilling and operational performance.

“Market conditions remain tough for most junior oil and gas companies. There were faint signs of increased investor confidence towards the tail-end of last year, but it doesn’t appear likely that they will be carried forward,” he said.

“The wider rally in global equity markets suggest the fall in the index was down to factors other than the global economy. Companies that are able to deliver and communicate exploration success will naturally face fewer challenges in raising capital. That leaves the rest of the market to pursue more innovative solutions, such as farm-out transactions, oil and gas prepayment deals and loan arrangements with service providers”, he added.

AIM universe contracts, but new entrants expected in 2014

Secondary fundraising by AIM’s oil and gas companies did rebound sharply in the final quarter of last year, but half of the £212 million total – the largest quarterly amount since 2008 – was shared between three companies. More than 80% of companies failed to raise any funds as the year drew to a close.

This, according to Jon Clark highlights “the continued divergence in the availability of capital” within the sector.

EY states that capital imbalances contributed to a net decrease in the size of the AIM oil and gas universe during 2013, but does not rule out rule out new listings in the coming months.

Clark concluded: “Companies with near-term production potential, positions in potentially high impact exploration plays and balanced risk portfolios will continue to attract investor attention. Improvements to market conditions may yet result in two consecutive quarters of growth in the Eye index before the year is out.