Finance Roll

I had never been to Odessa, Texas. From the perspective of a young stockbroker working in Pittsburgh in 1986, a trip sponsored by the oil and gas concern of Parker & Parsley to this little area of West Texas seemed an adventure. Two of my associates and I joined a number of brokers from across the nation for a two-day seminar discussing the merits of their limited partnerships. While the Odessa /Midland area can be extremely hot and dry - and none of us had ever actually seen tumbleweeds rolling down a major street before - it did turn out to an enjoyable and educational trip.

It was easy to walk away from that excursion with a deep respect for how challenging the oil and gas industry historically has been and remains to be to this day. From the early wildcatters to hydrocarbon exploration, a special type of entrepreneurial spirit is required to be successful. As a partner in a firm that specializes in offshore acquisitions, I can emphatically state that we take pride in assisting this sector with one of its major and reoccurring challenges. What issue seemingly plagues this industry more so than others? The answer is simple: business owners in oil and gas development are asset rich but, at times, cash poor.

Now more than ever, liquidity is hard to come by in this tight credit market. The ability to monetize not only those commodities you are currently mining or in possession of but those natural resources that are yet in-ground is essential to gaining the capital needed to expand your operations. However, obtaining these loans on non-producing reserves is challenging and often unattainable.

For many years now, especially in response to the current economic crisis, business owners and professionals have sought out alternative methods of "taking matters into their own hands." Owning a private bank or Trust Company has long been one strategy for protecting wealth and assets; today, oil and gas professionals are using this same strategy to secure rare and desirable loans against in-ground assets.

By owning a private financial institution and establishing bank-to-bank relationships with large lenders, commodities owners can monetize reserves without the cash-on-hand typically required for a private business to qualify. Typically, all that is required of private financial institutions is assay reports and geological surveys in order to obtain large loans. Additionally, upon acquisition of a private institution, owners will be offered lower than average interest rates against their non-producing reserves. For example, recently, we worked with a client owning $600M in non-producing oil reserves; he was able to obtain a loan of 5% of those assets, or $30M, at a rate of 3.5%.

In an industry as complex as oil and gas development and exploration, the steps to leverage your business to finance your growth are simple. Ownership of a private financial institution enables you to do monetize assets, both in-ground and non-producing, at lower rates than most major banks.