As the U.S. energy revolution drives the country toward energy independence, the surge in domestic production is generating additional demand for equipment. Acquiring the equipment required to support this boom will require flexible and innovative financing solutions from an experienced financial partner with a deep understanding of the energy industry.
Consider where the production growth is coming from. The hydraulic fracturing boom has shown little sign of slowing down, as the number of rigs operating continues to rise year over year.1 As the Gulf of Mexico recovers from the Deepwater Horizon event of 2010, companies are pumping fresh capital into lucrative offshore energy development. For example, BP, the biggest operator in the Gulf, has said it will invest $24 billion in new projects there by 2017.2
All of this growth presents another problem: how to get this newfound oil and gas to refineries. Pipeline operators are planning billions in new infrastructure investments during the next decade.
Meanwhile, as oil and gas production surges and utilities increasingly rely on domestically produced energy sources, the U.S. is beginning a massive overhaul of its electric power grid as it looks to upgrade its transmission capabilities and protect power systems from devastating storms such as Hurricane Sandy.
Given these significant capital demands, it’s not surprising that energy executives are girding for increased investment. CIT recently surveyed U.S.-based energy executives on the state of the industry and their plans for growth. Sixty-two percent of respondents said their company will be “active” when it comes to growth and investment in the coming months, and 23% called their investment and growth plans “aggressive.”3
Much of that spending will be focused on natural gas production, which continues to be a hot spot for the U.S. economy. New uses for gas — liquefied natural gas exports, natural gas-powered vehicles and increased use as a fuel for power generation — are ramping up, and the increased demand is expected to stabilize prices and add to production. As demand for natural gas increases, so will the equipment needs associated with hydraulic fracturing.
Even as rapid production has driven down natural gas prices over the past few years, activity has remained strong as companies continue to drill new wells to meet the terms of their leases or switch operations to production of oil and natural gas liquids. This is bolstering demand for all aspects of oil and gas production equipment, from fracking trucks to drilling rigs. Demand for equipment is likely to further increase as both oil and natural gas prices are expected to increase in the coming year. The fracking boom is also spurring demand for hydraulic pumps, tanks and other equipment that supports the fracking process.
With oil prices rising above $100 a barrel, onshore oil production should continue to grow in the next three to five years, which has a compounding effect on equipment needs. Oil and gas producers must replace equipment more frequently than other industries because of heavy use in recent years. As a result, equipment manufacturers will see an increase in new production orders as well as replacement orders needed to keep existing wells producing.
This growing domestic output of oil and gas has already underscored the need to expand the nation’s pipeline infrastructure, which includes gas-gathering systems and storage and processing facilities. This construction requires a wide range of equipment: front loaders, backhoes, cranes, trucks and other machinery.
In offshore production, higher oil prices will mean increased activity both in new deepwater wells and in efforts to boost production from existing prospects in shallow water. This will drive demand for marine transport and support vessels, including tugs, barges, maintenance boats and sub-sea inspection equipment.
While the country’s rising oil and gas production grabs most of the headlines, it’s only part of America’s energy renaissance. How energy is transmitted and distributed once it’s produced is an emerging area of opportunity and pent-up investment demand.
Utilities and public service companies are upgrading and overhauling their electric power transmission systems, enhancing their reliability, increasing their capacity and making them more durable in the face of extreme weather events. This overhaul requires financing of everything from bucket trucks that service power lines to vehicles that perform ground drilling and pole installation. To strengthen the grid against increasingly costly storms, power companies are elevating feeder lines on higher towers and taking other steps to “harden” the grid. All this requires additional construction equipment, as well as machining centers to make equipment such as transformers.
In less populated areas, the grid improvements often involve burying lines that had previously been placed on poles, which increases demand for excavation and construction equipment. In aggregate, the Edison Electric Institute projects that the nation’s utilities will spend more than $50 billion on transmission infrastructure through 2015.4
With such massive transformation underway, it’s little wonder that energy producers and utilities are counting on financing to help foot the bill. Nearly half of all the energy executives CIT surveyed said they will be considering financing in the coming year to help fuel capital spending and infrastructure improvements. Nearly as many (45%) said they will use financing for their working capital needs, and another 41% said they plan to finance production expansion.5
Given how rapidly the U.S. energy revival has unfolded, companies will need to secure financing quickly and ensure that their financing remains flexible enough to meet their ever-changing needs as they strive to capitalize on shifting market demands. This means that equipment manufacturers and their financing partners will need to fully understand the unique aspects of the business and structure their financial products accordingly.
For example, a company that uses trucks to deliver compressed natural gas as a replacement for heating oil in the northeastern U.S., where pipelines are scarce, may need financing that is tailored to the seasonal nature of the business and offers them structured payments based on this seasonality. The company may garner most of its revenue from September to May — when heating demand is highest — and little or none in the summer months.
Oil producers that operate in extreme weather conditions, such as the northern parts of North Dakota’s Bakken shale formation, where production may slow or even stop in the harsh winter months, may need financing solutions that recognize this unique characteristic of the business.
Innovation in financing alternatives will need to keep up with innovation in energy technology and new equipment classifications. Rapidly emerging technologies are redefining the traditional U.S. power market. As more businesses weigh the potential benefits of alternative energy sources, such as solar arrays or natural-gas-powered generators that produce power for their own operations and sell excess electricity onto the grid, they will require innovative financing solutions.
Given the competitive nature of the equipment markets and the outlook for interest rates, it’s the right time for companies that might otherwise delay their capital expenditures to move forward with financing. Rates remain historically low, yet the Federal Reserve is looking for support from the economy to begin increasing them for the first time in years.
Getting the proper financing for these ventures requires the expertise of a lender that has operated in energy equipment for years and understands both the history and the changes that are coming with America’s resurgence as an affordable and reliable energy producer.
Lenders who specialize in equipment financing can help identify innovative trends like those beginning to take hold in the energy sector. An experienced equipment lender can help construction and energy service companies find liquidity within their existing asset base through techniques such as monetizing their equipment. Equipment in their existing fleet may currently have a greater market value than the amount of the loan they initially received to finance the acquisition of the equipment. Companies in good financial standing may be able to recapitalize the equipment with new secured financing that reflects the equipment’s present-day lendable market value, creating additional liquidity from their existing equipment base that can be used to fund new projects.
In addition, lenders who understand equipment financing and leasing can get money working faster because they typically lend against a single asset or pool of assets, which requires less documentation than financing the entire capital structure and expedites the closing process. With banks that are solely traditional lenders, renegotiating a senior loan facility can take months and require changes in terms, amendments to the original loan agreements and extensive paperwork.
Companies that supply the bustling U.S. energy sector need to take the long view not only when it comes to their investment planning, but in their financing relationships as well. It’s easy to shop for the one-off financing transaction, where the lowest rate typically wins, but you get what you pay for. As the energy resurgence transforms the industry from a position of scarcity to one of abundance, you want a financing partner who is going to be with you for the long haul, helping you stay ahead of your equipment needs so you can focus on realizing the many opportunities in the market today.
Vincent Belcastro is managing director of CIT Capital Equipment Finance, where he is responsible for large-ticket equipment leasing and lending. Belcastro is a senior banking and leasing professional with more than 20 years of secured and structured financing-related experience in the corporate finance arena. Throughout his career, he has covered companies in a wide array of diverse and unique industry sectors. To learn more about the financing solutions offered by CIT Capital Equipment Finance, visit cit.com/capitalequipmentfinance.
Footnotes:
1. http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-rigcountsoverview ↩
2. http://www.2b1stconsulting.com/bp-to-increase-capital-expenditure-to-27-billion-annually-by-2020/ ↩
3. http://www.cit.com/energyoutlook↩
4. http://www.eei.org/issuesandpolicy/transmission/Documents/transmission_investment.pdf↩
5. http://www.cit.com/wcmprod/groups/content/@wcm/@cit/documents/images/energy-outlook-report-2014.pdf ↩
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