With the high yield market starting to show signs of becoming less favorable as investors learn the hard way that there’s a reason [6] why the coupon is 11% and with equity issuance already running at 10X last year’s total through March, struggling oil producers may have to get more creative when it comes to raising money if prices remain subdued (which, as we’ve explained at length, they likely will). Fortunately there’s the JOBS act which will not only help you become an angel investor in the next billion dollar app, but will now also let you fulfill your dream of becoming a wildcatter in Texas. Here’s more from Reuters [7]:
Equity crowdfunding, or raising capital directly from a large group of investors, is widely used for projects from technology to fashion. Now, at least two small Texas firms are testing the concept in the oil and gas industry.
Potential prospectors, hoping to tap into smaller projects that big banks would normally pass over, are taking advantage of recent federal legislation that allows crowdfunding by for-profit companies.
EnergyFunders, a tiny 6-person firm in Houston, has signed up 800 investors since its unofficial launch in July, around the time crude prices started a 50 percent slide over the next six months.
So just as you can chip in a few months’ paychecks to fund an indy film, you can now buy into possibly-real oil and gas exploration companies and while the fact that the 6 people who dreamed this up picked the exact moment when prices started to collapse to start the venture might lead some prospective investors to question how deeply their expertise in the field truly runs, EnergyFunders explains that they’re simply helping struggling producers tap into the last available source of funds now that everyone who knows what they’re doing is running for the hills:
"This allows small oil and gas operators to get funds when large institutional investors are turning away from the industry," said Philip Racusin, chief executive officer of EnergyFunders.
CrudeFunders, a similar firm, reminds us that small investors have been throwing their money away for centuries, so really this is just par for the course, only with a hip, modern twist:
"Capital has been raised and invested directly into oil and gas projects for over 100 years, we're just taking it into the 21st Century," Racusin said.
Just as there those who think putting America’s retirement funds [8] into overvalued, private tech startups may be a bad idea, some so-called “experts” caution that drilling for oil and gas is actually quite complicated and without the proper background, it would be very easy for “investors” to dig themselves a hole (no pun intended):
Christopher Ross, a former BP Plc executive and today finance professor at the University of Houston's C.T. Bauer College of Business, cautioned that directly investing in oil and gas can be tricky for investors unfamiliar with geology, drilling technology, and the arcane world of mineral leases and royalties.
"I don't want to pour cold water on what might be a valid new source of funding, but from the investor's point of view I would say a very strong caveat emptor (buyer beware)," he said.
Not so says Austin-based web marketer Scott Morris. It’s all about buying the dip:
Scott Morris, a 57-year-old Web marketer based in Austin, Texas, invested $5,000 in the project.
"With oil at $50 (a barrel) or below, it's the perfect environment to get our hands on these."
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Enough said.
