The Market Is Hungry For Success

Tips on Financing Exploration

Major exploration efforts are essential to identify badly needed new reserves. Yet the exploration segment of the industry remains somewhat lethargic — for a number of reasons.

The average mid-cap E&P company reported an average success rate of 82 percent for the last three years, according to industry veteran Stuart Burbach, who presented some of his views on exploration during the Perspective 2004 forum at the recent AAPG Property and Prospect Expo (APPEX) in Houston.

This success, however, is attributed in large part to such relatively low-challenge-type projects as infill drilling, shallower completions, step-outs and the like — in other words, non-exploration.

It's a bottom-line thing, according to Burbach, who cautioned the audience not to fall into the "90-day report card" trap, referring to Wall Street's unrealistic demand for specific growth numbers from the E&P companies every three-months.

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Major exploration efforts are essential to identify badly needed new reserves. Yet the exploration segment of the industry remains somewhat lethargic — for a number of reasons.

The average mid-cap E&P company reported an average success rate of 82 percent for the last three years, according to industry veteran Stuart Burbach, who presented some of his views on exploration during the Perspective 2004 forum at the recent AAPG Property and Prospect Expo (APPEX) in Houston.

This success, however, is attributed in large part to such relatively low-challenge-type projects as infill drilling, shallower completions, step-outs and the like — in other words, non-exploration.

It's a bottom-line thing, according to Burbach, who cautioned the audience not to fall into the "90-day report card" trap, referring to Wall Street's unrealistic demand for specific growth numbers from the E&P companies every three-months.

Other, yet related, issues he cited for stalling exploration efforts include:

  • Fear of loss of investor confidence.
  • Fear of downgrading by analysts.
  • Industry-wide beliefs that acquisitions are better (safer?) targets.
  • Capitalized effects of front-end cost G&G items to company's bottom line.

A Hungry Market

"Right now, it seems the industry has forgotten about making discoveries and is focusing its efforts on anything but exploration," said John Seitz, co-chief executive officer and director of Endeavour International Corp., during his keynote luncheon talk at APPEX.

"The result seems to be a lack of high quality exploration opportunities, which is what I'm hearing from a lot of people," he said.

Steps that companies might take to remake their exploration efforts include:

  • Rebuild the tried and true methods of their internal capabilities.
  • Build virtual organizations and access a worldwide network of experts (companies often engage experts just retired or laid-off).
  • Outsource all or some exploration, supplementing the portfolio with a variety of prospects from a variety of sources. The market cares about the portfolio and the predictability of investments, not necessarily where they originated.

"Not only is there a market for exploration prospects, there's an even stronger market for discovered fields," Seitz said. "In a newly developed field, you can play along the value chain depending on expertise, data and capital.

"The market is hungry for higher returns to be delivered by exploration success," Seitz said. "Private equity providers and drilling funds are looking at skilled managers to select drilling opportunities, and looking for skilled teams for ready-to-drill prospects. Investors in these are looking for opportunities that provide a greater ROR.

"But you must be realistic with your program," Seitz noted. "If you're realistic, then portfolios will include your projects."

Making It Happen

Seed money and access to data can be formidable obstacles to generating drillable prospects, particularly for small independents/prospect generating teams. Seitz presented a how-to scenario to make things happen:

  • Put together like-minded professionals with the right combination of skills.
  • Invest in computers.
  • Invest in office space, or work from home as a virtual team, communicating and sharing data over a broadband connection.
  • Offer an exclusive arrangement to investors for startup capital.
  • Cut a deal with seismic company for data and services.

While the prospect is key to exploratory drilling, even the best prospect is not enough, Seitz cautioned. Non-G&G uncertainties can be formidable and have a dramatic impact on any project. Political risk, commodity prices and project timing all impact project profitability.

Burbach presented a general outline of steps the industry as a whole can take to reverse the trend to drill the easy, known accumulations and go after the more challenging stuff that has the potential to beef-up reserves meaningfully:

  • Set aside a percentage of the budget for exploration, and do not waiver (champion the cause).
  • Be prepared to really take risks (analysts must understand).
  • Keep the staff on the project to completion (give people time).
  • Believe in the process (if it's a play or a concept, stay with it).
  • Legislate for an energy policy that treats front-end cost realistically.
  • Enjoy this wonderful business; no other job is as rewarding or thrilling.