The Impact Of A Potential Industry Slowdown

We have spoken before about institutional money (Wall Street) pulling back from investing and making loans in the oil and gas space. This is due to a need for producers and ancillary companies to operate with positive profit margins. Before the finance pullback, you did not necessarily need to be profitable to survive, just issue more debt or equity to fund growth. This principle has changed, and the industry is now expected to start creating excess profits. This paradigm shift has manifested itself in some interesting ways. The takeover of EQT by Toby Rice, the Carrizo acquisition by Callon, and the Anadarko-Occidental merger have all been motivated by increasing free cash flow (distributable earnings to shareholders) through one strategy or another. In addition, in Appalachia, we have seen private operators stop drilling due to low commodity prices, Montage resources and JKLM have both announced the shuttering of rigs. We have touched on how the Appalachian capacity build-out was likely to improve regional price differentials, but depress Henry hub pricing, this has occurred. However, when low prices occurred in the past, a producer could always go to the bank to borrow some money to keep operations going.

What does all of this mean if you are a landowner or producer? If you are a landowner waiting for your land to be developed, it may take longer than first thought, as development activity is slowing down across the board. However, in the long run, this could be good for commodity prices since they are a function of demand/supply, and this will result in a muted supply. If you currently have production, you should be worried about falling prices in the near term. Our products can help with mitigating prices falling further. If you are a producer, it is becoming much harder to access the traditional financing solutions that have fueled this industry. Advance Royalty Company has developed products that have allowed us to step in and fill that gap. If you currently have production and would like to realize the future value of your production in the near term, we are your solution.

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