Establishing credibility in a new E&P business venture

A relatively high and much more stable oil price has generated a lot of renewed investor interest in the North Sea upstream E&P sector over the past 12 months or so. Last month, in the UK Government’s 2018 Budget it was announced that the current headline tax rate will continue, therefore demonstrating its assurance to sustain and encourage ongoing economic and fiscal competitiveness and attractiveness in the basin. Under these more favourable economic conditions and with up to 20 billion barrels of oil still to recover in the UKCS, there is undoubtedly a lot of enterprise opportunity still to go after.

We are seeing increased activity from larger organisations re-adjusting their portfolios – to others beefing up their asset positions and some developing start-up and market entry strategies.  On and off- market, there are many assets up for sale and it has been widely reported that the Private Equity funding sector is playing an increasingly active role. In the North Sea, we are once again building an alluring list of success stories that many of us aspire to.

For every solid new business that is a success however, there are others that do not make it. It might be that a new business has access to high quality and high potential hydrocarbon assets, but are they ready to become a serious player? With this in mind, what should a new E&P business venture consider when setting up and getting going?

Team

Assembling a good, high quality team is essential, especially if a new venture will be looking to Private Equity organisations to provide funding. What connections do the team have with each other as a unit and what have they achieved together? Experience and team track-record evidence is crucial when starting up a new business in the upstream sector. What reputation do they have as individuals and together, what are their skillset strengths and weaknesses? There are several key disciplines to consider, from subsurface to finance. How will any gaps be plugged?  The new team does not have to be very big to be successful, but in the external market solid industry contacts will contribute to their success.

Credibility

This is a crucial factor with regards to the team, however take this one step further and credibility, first impressions and perception are vital in the early success of any new venture. In a situation where support and funding are sought, everything from the quality of presentations, what is said and how it is said – to the strength and quality of a business plan, financial projections and economic modelling and evidence behind all assumptions are all critically important.

Diligence

When presenting a business case, evidence of high quality diligence on an upstream asset is essential and will be part of any business plan to be presented to potential investors. What about diligence on people who might be supporting or connected to your business? Others will be doing this to you, therefore be aware of what they will look for. Do your own diligence on those who you might engage with, whether they are potential investors, partners, advisors and service providers. How credible are they? Consider their reputations from those you trust and find out their track-record of delivery. After all, they might be representing your business at some stage soon.

Funding

As part of your business plan, what seed funding is required to get started? What are the potential funding sources for your business? What is your network like and what sort of advisory support do you need? What funds are needed now to engage crucial advisors? Once you start building capital, it can become more straightforward to obtain more, but how does the plan look to achieve this?

These brief considerations around people, credibility, diligence and funding just scratch the surface and of course, there are many other important factors and business cases to think about when setting up a new E&P business venture.

For more information please contact Alasdair Green or your usual AAB contact.