The Issues In The Oil Industry Essay

Today, the oil industry faces considerable problems because of the steep decline of the oil price within the last year. In addition, the increased oil production accelerated by the development of the shale oil production in the US aggravates the situation even more because the world market faces the problem of the oil oversupply and oil prices keep going down. In such a situation, companies operating in the oil industry have to raise funds to keep growing but they face considerable problems with raising funds because investors are, to a certain extent, disenchanted by declining oil price, while banks are anxious that oil companies may face a steep decline as the oil price remains low. In such a situation, companies operating in the oil industry have to search for new methods of fund raising, including issuing new shares to fund their new projects, as is the case of Concho or Memorial, for example.

In fact, Concho and Memorial issued new shares to raise funds and this decision has proved to be quite effective. Oil companies face difficulties with raising funds at the moment and issuing new shares allows them to attract new investors, who are still confident in the oil industry and are ready to invest into their new projects (Dezember & Driebusch, 2015). However, at this point, it is worth mentioning the fact that Concho and Memorial attracted investors by its new projects because both companies needed to raise funds to develop new projects. Therefore, they expected to increase their production after they have raised funds. This is why investors were aware that their investments will not be just spoiled. Instead, they would be invested into real projects that can bring profits both in a short run and long run.

On the other hand, both companies would likely to face difficulties, if they have tried to raise funds without developing new projects to attract investors. In fact, the simple issuing new shares without offering new projects would rather disturb investors because this would be a sign of financial difficulties that companies might have experienced. In such a case, both companies would face substantial difficulties with raising funds because of the investors’ uncertainty in the future of the companies and their financial stability. This is why the purpose of raising funds has played the determinant part in cases of both companies. Investors being certain in expected benefits from the development and successful implementation of new projects were ready to invest their money and to purchase shares of Concho and Memorial.

In actuality, the oil industry is facing considerable difficulties because of the low oil prices. This is why companies like Concho and Memorial face considerable difficulties with raising funds for their business development. In this respect, traditional ways of raising funds fast do not always work because of uncertainty of investors as well as financial institutions capable to lend money to oil companies in the future oil price. In fact, they are disenchanted because expectations of investors have failed to come true recently, when oil prices have started a slow growth. Investors expected the oil industry to recover and oil prices to keep growing finally. Instead, after a slight rise o oil prices, they have fell down again below $50.In such a situation, investors are disenchanted because they cannot gain expect on exorbitant profits, which companies operating in the oil industry have managed to rip of during the previous period of high oil prices, when the oil price has exceeded $100. The low oil price is one of the major concerns of investors and banks. This is why oil companies cannot just use bank loans as abundantly as they used to do in the time of high oil prices because banks are not willing to lend their money to oil companies at low interest rate because the further decline of oil price may trigger the deep crisis in the oil industry.

In addition, traditional ways of raising funds do not always work now because oil is a scarce resource and some oil companies, which attempt to raise funds may have difficulties to develop new shells and maintain the oil production at the target level because they simply run out of oil, while new shells are either inaccessible to them or they cannot be as rich in oil as they have to be to cover investments of companies in their development (Deudney & Flavin, 2007). In such a situation, investors and banks consider carefully before they take a decision to give money to companies operating in the oil industry.

Therefore, the development of new projects is quite a positive sign for investors and banks, but it does not mean that banks will give loans immediately, just as soon as they learn that a company, like Concho or Memorial, will develop a new shell or another project. Even new projects are risky because of the scarce nature of oil resources. This is why companies like Concho and Memorial have to refer to investors and to issue their shares to sell and, thus, to raise funds to cover costs of new projects. These projects are essential for their further business development. Otherwise, they will stumble in their business development as the oil price goes down and the oil supply decreases. They have either to increase the production of oil or increase the oil price to maintain their positive financial performance.

 

References:

Deudney, D. and Flavin, C. (2007). Renewable Energy. In Blackburn, J.O. The Renewable Energy Alternative. Duke University Press.

Dezember, R. and Driebusch, C. (2015). Market Warms to Oil-Share Offerings. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB20200446557404923797204581267571326988208

 

The terms offer and acceptance. (2016, May 17). Retrieved from

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"The terms offer and acceptance." freeessays.club, 17 May 2016.

[Accessed: March 28, 2024]

freeessays.club (2016) The terms offer and acceptance [Online].
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[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]
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