Have money, looking for oil and gas deals and young companies positioned to grow.
This statement no doubt would make for appropriate ad copy given the current highly charged state of the oil and gas industry.
In fact, the money folks are all over the landscape these days. And they’re offering a mind-boggling array of financing vehicles -- all of the usual and some not so well known.
One of the not-so-familiar sources of capital for smaller companies is the AIM (Alternative Investment Market) on the London Stock Exchange.
If you’ve been depending on private capital and project financing to grow your company, AIM may be the public vehicle to steer you to the money needed for your company’s future. But bring along a good business plan, which will figure prominently in your success with investors once you’re listed in the marketplace.
Unlike the U.S. Nasdaq, AIM is a self-regulated market. It offers small companies access to institutional investors and hedge funds that are comfortable with high-risk ventures such as exploration plays, recognizing this can lead to high rewards.
“The appetite for companies sub-$100 million U.S. is greater here,” said Scott Richardson Brown, associate partner at Oriel Securities, a London-based corporate and institutional broker. “AIM takes companies of most any size, usually $10 million and above,” Brown noted, “and I’ve seen companies as small as $2 million come to market.”
Trusting the Nomads
Before you decide it’s just too complex to go into the public venue, relax. Relatively speaking, the AIM process is fairly painless -- and it’s faster and reportedly about half the cost of listing on the Nasdaq.
Expediting the process is the group of financial advisers, otherwise known as nominated advisers, or “Nomads.” They ensure all the rules are followed and, among other services, provide a sort of hand-holding service -- albeit a sophisticated hand -- for the listing company.
“The Nomads provide advice and guidance for the company,” Brown said. “Also, they must do due diligence and regulatory work to ensure the company can pass the rules and regulations.
“Besides the Nomads, you need a broker to provide research and support and raise money for you as you need it,” Brown said. “You can come to the market with a very small market cap, but afterward you need to build up liquidity and depend on your broker to keep investors in the market informed on how you’re doing.”
Brown emphasized it’s important to justify why you’re coming to London -- particularly if the company is based in Houston, for instance, and maybe drills only in the Rockies and can’t get funding in Houston or New York.
Be prepared to make a number of convincing speeches to advisers and Nomads.
Once listed, it’s imperative for the company to deliver on what it said, and one of the drivers to help ensure this is not to overprice the issue, Brown cautioned. This leaves nothing on the table for the investors coming in and leaves the company hostage to fortune if it doesn’t do as well as thought.
Trying Something New
The AIM market has attracted rising interest from E&P companies worldwide in the last couple of years owing to the dramatic increase in industry activity.
It caught the attention of Houston-based Frontera Resources, which has been around since 1996, doing deals via private equity and project financing.
That’s all changed.
Recognizing the opportunity offered by public equity markets, Frontera launched an IPO on the AIM in March 2005.
“We raised about $88 million U.S.,” said Steve Nicandros, CEO at Frontera. “It was a good experience, largely because we had a good business plan to take to the market, and we had a good underwriter in Morgan Stanley, which also is our Nomad.
“We went to the market to raise capital for our drilling program and found AIM to be the most efficient way to raise new capital,” Nicandros said. “When you dig into the AIM market, it’s a huge market with a lot of institutional investors looking for good business plans to invest in that have a significant amount of upside associated with them that maybe is not realized in the stock price.
“It’s a very visible market for growing companies like us to access capital,” Nicandros noted.
There’s been talk that one reason to list with AIM is to avoid the time consuming, costly Sarbanes-Oxley, a 2002 corporate governance law.
Not necessarily so.
“You can’t avoid this as an American company,” Nicandros said, “and there are some good things in place there that are a good idea to follow. You’re subject to certain elements of that requirement even on AIM.”
Time for Good Ideas
This is not the case with Benchmark Oil & Gas, which operates close to Houston.
“We merged with a Swedish company in 2001,” said Robert Pledger, president, “so we’re taking a Swedish company public. Benchmark Oil & Gas AB is going to the market, which is our parent company.
“Sarbanes-Oxley in the U.S. doesn’t apply to us,” Pledger said, “but each country is beginning to adopt stringent and difficult reporting requirements. For instance, in Sweden where we sign our annual report, we are saying we have personal knowledge of what goes into that report regarding financials and so forth.
“There is no corporate shield in Sweden,” Pledger said. “You are personally liable for your disclosures, and you must know what you’re doing.”
Benchmark is working with a brokerage house to get listed on a Swedish exchange. The brokerage is one of the founders of the AIM exchange, and Benchmark is considering the possibility of a dual listing. Pledger noted AIM opens up a much larger population to get exposure. Whether a single or dual listing, they will be located where market makers are interested in the company.
Pledger makes a good case for getting into the public venue.
“Most independents spend 80 percent of their time looking for money to do what they want to do and 20 percent of their time doing what they want to do, which is find oil and gas,” he said. “With a company in the marketplace with underwriters and market makers, you can go with secondary offerings, you can float bond issues, you can put together joint ventures that give people the ability to have some collateral if they loan money to the company other than owning assets of the corporation.
“This has taken a lot more effort than originally thought,” Pledger emphasized. “But it will accomplish a goal I’ve had, which is to create liquidity and provide us the financing to do things we want to do.
“I’ve never met an independent who was idea restrained; they’ve always been capital restrained,” Pledger said. “This gives us an opportunity to change that position.”
Servicing the Servers?
Although the AIM market is attracting increasing numbers of E&P companies, this apparently is not the case with oil service companies. But this may be about to change, starting with Global Geophysical Services.
For now, Global is engaged in private equity placement on the domestic front, which reflects the early stage the company is in, having become operational early in 2005.
“We’re considering AIM,” said Craig Murrin, vice president, secretary and general counsel at Global. “When we have more earnings history and get to a point appropriate to consider ways to give existing shareholders liquidity as well as raising some more money, we will look at it very closely.”
Mirren emphasized the important role of the Nomads for a company like Global.
“For our company where all our management is strong on the operational side but little experience talking to the markets,” Mirren said, “it’s something quite valuable.
“Going forward, an AIM listing would make it possible for us to set up an option plan and recruit people in the future with options and not by issuing shares,” Mirren noted. “It will increase our business opportunities because we’ll be publishing financial statements and people will be able to see our financial condition and know they’re dealing with a substantial entity.”
Line Up the Ducks
As with most things in life, a seemingly unlimited upside has a downside counterpart of one kind or another, and AIM is no exception.
“London is not a market that will invest in just anything,” Brown cautioned. “You need a good story and need to provide assurance you can deliver what you say you will.
“Liquidity will be tight when you first come to market,” Brown noted, “and your directors will be locked in, unable to sell any shares for 12 months -- and they often own a large share of the company.”
The savvy players know they must come into the market with all their ducks in a row.
For instance, Nicandros noted they were put through the rigor of a Nasdaq listing by Morgan Stanley to be able to put themselves into the marketplace.
Because there are no strict requirements for, say, “x” years of revenue and earnings, the occasional “overnight” listing does happen -- and potential investors must do some serious homework before investing in companies on the AIM.
“There have been a couple of small traffic accidents on AIM in the last few years,” Nicandros noted. “But those things slip through once in a while.”