As pundits and journalists forecast the future of America’s shale oil industry, beware the naysayers who believe the investors and lenders will not want to do business with U.S. shale oil firms in the future. We have had over 160 years of experience to show us that if there is a plan for oil, a skilled business leader can get the financing. Opportunities in oil are too enticing for many financiers to ignore.
Moreover, we should not mistake what good entrepreneurs and investors are looking for in oil today. They are only looking for a business that will “strike it rich.” They are not going to the oil fields looking for the next Google
or Standard Oil. And there is every reason to believe that oil prices will return to $40, $50, $60 per barrel and higher in the coming months, meaning “strike it rich” will be a real possibility again.
In the 1850s, a lawyer named George Bissell and a chemist from Yale University named Benjamin Silliman Jr. formed the Pennsylvania Rock Oil Company with financial backing from wealthy northeasterners and bankers. That company became Seneca Oil, which produced the first commercial supply of kerosene from refined crude oil. Seneca Oil began a long tradition of oilmen across the U.S. and the world seeking funding from investors. And it began a tradition of such investors often eagerly participating in oil ventures.
There are few long-lasting oil giants, and good investors know that. Investors are not looking for the next ExxonMobil. 1870, John D. Rockefeller and Henry Flagler formed what became the Standard Oil Company. After a breakup forced by the U.S. government, segments of Standard Oil became a variety of different companies over the years, but today its descendants include ExxonMobil
, Marathon and part of BP. BP is British, but the other three are American. Thus, of the top four American oil companies today according to the Forbes Global 2000 list, three are descendants of Rockefeller’s 1870 firm. The third and fifth U.S. oil companies on that list are Phillips 66
, both of which trace their lineage to companies also formed in the nineteenth century and early twentieth century.
But we just don’t make oil companies today in the U.S. that take off like Standard Oil or Cisco or Facebook. Entrepreneurs and investors don’t expect them to. There is no notion that a new or refurbished oil company is going to become a half-trillion-dollar firm. Rather, the idea is to obtain oil assets, primarily through leasing, and strike it rich by hitting oil and selling it.
For an entrepreneur in the oil business, profitability, expansion and longevity might be great. Such a scenario would mean prolonged success. But an entrepreneur can hit a payday without prolonged profitability, and many entrepreneurs know this. No one is going to become the next Rockefeller, and no one is trying to be.
For investors, oil is a risky bet, but it can be worthwhile. Depending on when an investor gets in and how powerful the investor is, the risk may be limited. The same can be said for lenders. A financial institution will be a secured creditor or bondholder, meaning it will be among the first to be paid back if the company files for bankruptcies or liquidates.
Still, an oil company is a risk, but the rewards have always been big enough to entice enough investors to take that risk. Oil is referred to as a boom-bust business for a reason. Oil operations fail when the market changes or when the resources give out. And yet investors have been there with capital for over 160 years, because when it works, it works—even if that is only for a short time.