I have previously commented in The Producer about the cyclic nature of the oil and gas industry. For those of us who have been involved in upstream exploration and development for a decade or more, we’ve become accustomed to the ebb and flow of business activities, and acutely sensitive to clues that may indicate the next stage or direction of movement within a cycle. Correctly interpreting directional trends over the intermediate term allows one to place strategic bets on specific plays and opportunities. Getting these generally right over the long term ultimately determines the success or failure of an enterprise.
Profits emerge from adjusting corporate plans to the constantly changing stream of structural and temporal events that affect every company. Explosive oil industry growth was initiated in 1972 when the Texas Railroad Commission lost control of its ability to hold world oil prices near $3 a barrel where it had been for decades, allowing OPEC to raise prices to levels never previously seen. Such a fundamental change in the price structure created conditions that fostered new growth of old companies, the creation of many new ones, and the subsequent intellectual and technological developments in the industry. Results of the change can hardly be overestimated. Almost none of the oil and gas the world uses today could have been profitably found and produced within the price structure that existed prior to 1972.
Events of such magnitude and significance are rare, but a multitude of other factors that can move commodity prices weigh in daily. OPEC still maintains production quotas for its members. Policies of non-OPEC countries often determine export volumes. Wars, insurrections and labor strikes throughout the world interrupt orderly supply deliveries. At times, hurricanes, floods and other weather related events require that wells be shut in. Seasonal weather patterns do not always follow predicted forecasts, causing temporary misallocations of production and product deliveries. In the U.S., federal, state and local politics, public demonstrations and anti-development movements, environmental regulations, tax policies, and a myriad of other issues add cost, uncertainty and delays to planned activities. Each of these factors may cause temporary difficulties, but are generally considered more as annoyances than major issues.
The most recent revolutionary and structural industry game changer has occurred not only as a result of increases in oil and natural gas prices, but by advances in petroleum technologies.
Hydrocarbons can now be produced from shale rocks that contain a high percentage of organic matter that were previously considered too “tight” to produce the oil and natural gas they contain. The combined application of horizontal drilling within a shale layer and hydraulic fracturing (“fracing”) has opened large new areas of the U.S. and elsewhere to petroleum production. The result has been that estimates of the world’s producible reserves of oil and natural gas are being increased substantially, making the benefits of abundant energy supplies available to millions of additional people.
For Five States, the opportunities to support and finance activities and construction projects in these new areas are increasing. The number and size of projects that are being submitted to Five States for review and analysis are increasing, and the quality of projects is improving. As individuals and companies expand their drilling and development commitments they may need additional equity and mezzanine capital, consulting expertise, or a financial partner. Five States has the reputation, funds, experience and personnel to provide help in these situations.
Currently we are processing data on almost a dozen submittals, with a prospective total commitment of $180 million. Typically, only one or two of these are likely to be approved, but others are being received almost daily. Five States’ financing activities are focused in three areas: infill drilling and lease enhancements of existing properties; infrastructure construction of pipelines, compression facilities and stripping plants; and acquisitions of producing property interests.
In the past two years, we financed a company that owns and operates workover rigs, provided millions of dollars of credit facilities to companies to acquire and develop producing properties and establish water floods, invested with a consortium of industry partners to build a pipeline, loading facilities and a rail line to move oil out of North Dakota to a contracted purchaser, and acquired producing properties for our Fund 1 investors. In all cases, our focus remains the same: to acquire high quality producing interests and related infrastructure that will generate attractive income.
We anticipate having the remaining committed funds of Fund 1 invested by year-end or early in 2013. We now are planning to open Fund 2 in early 2013.