Energy experts say the US is on the verge of an oil and gas boom akin to the famous Gusher Age of the early 20th century. But new drilling techniques and shale discoveries will do more than boost domestic oil production—they will also force lenders to think differently about borrowers in the oil and gas sector, writes Kevin Boland, a Tiger Group assistant vice president, in a June 26 blog post for online publication Equipment Finance Advisor.
In the piece ("Fracking and Shale Industry Kicks Off New Era for Oil & Gas Sector"), the veteran appraiser describes how high-volume hydraulic fracturing has helped the US energy sector extract more and more petroleum and natural gas from deep beneath the surface of the earth. "The development of this technology in itself would be a boon to borrowers in oil and gas," he notes. "But it happens to also coincide with a string of truly massive shale discoveries in states such as Texas, Arkansas, Louisiana and Pennsylvania."
Multiple studies already highlight rising oil and gas production, and some observers now say US oil production will surpass even Saudi Arabia's by 2020. While pointing to concurrent trends associated with the US production surge like benefits to domestic chemical and steel producers, the shift of the industry to an export model, and ongoing innovations in hydraulic fracturing technologies, Boland warns that lenders need to be aware of the energy market's special challenges.
For one thing, all drill sites are not created equal. As Boland notes in the column, some operations target gas extracted along with oil and then separate the gas downstream at a refinery; others go after simple pockets or reservoirs of gas in the ground through vertical drilling, while hydraulic fracturing operations extract the gas by creating fissures in the shale play.
"When evaluating collateral for equipment finance companies, the appraisal firm needs to understand the type of energy source being extracted and how this affects the required M&E," Boland explains. "The appraisal team should determine whether the drill setup has been customized for the geographical particularities of the site. If so, then moving this M&E to a different site could be problematic, thus affecting potential resale value."
Moreover, all borrowers involved in hydraulic fracturing will not necessarily be profitable, in part because "dud" wells are commonplace even within otherwise-productive shale plays, Boland writes. Likewise, environmental objections also amount to a question mark hanging over hydraulic fracturing.
"Optimistic predictions should always be regarded with skepticism, particularly amid wildcards such as the still-volatile global economy and environmental activism," Boland concludes. "Nevertheless, many indicators do suggest remarkable strength in the oil and gas sector for years to come."