Sources of Capital for the Petroleum Industry
Authors: Waag William R. 
Published: December 2007

Introduction
Recently, an esteemed associate of ours was quoted as saying the petroleum industry, in attempting to supply the ever-increasing energy needs of the country, is on a collision course with our environment. I believe we may be near an impact from the standpoint of the problems the industry is facing in construction of the Trans-Alaska Pipeline.
Joel D. Fisher has forecast a demanding capital-expenditures multiple for refining, marketing, transportation and production. The alarm has been sounded again and again covering the need to fulfill the energy requirements of the consumer and our security, while at the same time, the petroleum industry may outstrip its capacity to satisfy its capital needs. Historically, self-financing of the petroleum industry has been trending downward, from petroleum industry has been trending downward, from 95 percent in 1960, to approximately 74 percent in 1969, and an estimated 69 percent in 1970. The petroleum industry is on another collision course petroleum industry is on another collision course and that will be with the money market makers, if this trend continues.

SOURCE OF CAPITAL FUNDS
We must go back several years and examine the source of working capital for a group of major, and large and small independent companies. Table 1 covers the major capital needs of the industry in all categories of refining, marketing, transportation, and production and takes into focus a short but effective trauma (1969–70) in the economic and financial structure of the U. S. Table 1 further indicates that, over a 5-year period, the industry continued to supply its major capital needs from internal sources; however, on a decreasing basis. Combining the data under "Source of Inside Funds", self-financing was 80 percent in 1966, 75 percent in 1967, 70 percent in 1968, 74 percent in 1969, and an estimated 69 percent in 1970. In the area of the "Outside Sources of Capital", the banks and insurance companies supplying borrowed monies continued to meet their challenge by taking larger positions in the industry, which on a combined basis positions in the industry, which on a combined basis increased hour 5 percent in 1966 to an estimated 12 percent in 1970. In the public sector, as the capital percent in 1970. In the public sector, as the capital requirements of the industry continued to rise and the self-financing portion decrease, an interesting fluctuation is evident which appears to reflect the cost of money.
In 1966, the combined public sector represented 8.9 percent of all capital requirements; 1967 15.3 percent; 1968 14.9 percent; 1969 9.6 percent percent; 1968 14.9 percent; 1969 9.6 percent (a marked drop); and, in 1970, an estimated 14.2 percent again. In reviewing the money and securities percent again. In reviewing the money and securities markets during that interval, we find that, in 1966, the prime rate reached a high of 6 percent, up from 4 percent, while the Dow Jones Industrials dropped from 980 to 800, or 180 points. During 1967, the prime dropped to 5 1/2 percent, averaged about 6 1/4 percent in 1968, while the Dow Jones moved up to percent in 1968, while the Dow Jones moved up to the 960 range. In 1969, when the petroleum industry did not use the public market to a large degree, the prime reached a new high of 8 1/2 percent, and the prime reached a new high of 8 1/2 percent, and the Dow Jones again dropped back to the 800 range. In 1970, we saw the industry go back into the market, mostly during the latter half as rates came down, and the Dow Jones finally started moving up from a low of 625 to over 830.
Note in Table 1 how the publicly sponsored drilling programs, plus an estimated percentage for private programs, plus an estimated percentage for private programs, increased their capital participation in the programs, increased their capital participation in the industry through the spending of considerable dollars, not always prudently, however.

SOURCE OF INSIDE CAPITAL
It would appear the petroleum industry will continue to have pressure on its ability to generate capital internally and will be forced to turn to outside financing more than ever before. Historically, the desired debt equity ratio of the industry has been in the area of 25 percent based upon Chase Manhattan's study of 27 companies. Some petroleum, investment-oriented people feel this is low when measured against some people feel this is low when measured against some utilities and other industries where the average is in the area of 45 percents. Raising debt loads is not necessarily bad and often indicates an aggressive desire to expand operations more rapidly than permitted by self-financing. Some large independent companies are presently registering ratios above 40 percent.
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