Why companies can't get financing for profitable projects
Climbing "Capital Mountain" is getting harder and harder.
Alberta Oil investigates the conundrum that resource companies face when seeking investment: a project may look great with established long-term profitability but the up front cheque that a money person needs to cut is getting bigger and bigger. It's an amount that is hard to front, and the costs continue to escalate.
More projects are becoming unconventional and the regulatory burden is onerous. With these high costs, it is hard for companies to pay for projects on their own:
Upfront capital costs continue to increase as companies are drilling in deeper waters, looking for oil in places where traditional imaging techniques are useless, and are focusing on unconventional resources like the shale plays and the oil sands. Tack onto this the fact that oilfield services companies are charging a premium for this complex type of work, and that governments around the world have increased their tax take from resource extraction, and the story starts to look pretty grim. So while projects may show long-term profits, companies struggle to build up a cash mountain to match the size of their capital requirements.
And that pushes companies to the banks with all the requisite drawbacks.
If a company takes on too much debt, it can effectively be owned by a bank, severely limiting day-to-day decision-making capabilities of the company’s leadership. The other issue is that in order to gear up on debt, all investors have to believe your growth story, or you risk gaining cash from the banks and the markets at the expense of losing cash from existing investors.
Image of soldier attending the U.S. Army Special Forces Command (A) Mountaineering Program