Seismic reflections: Heavy cash
Most growing oil and gas companies are in need of cash to fund exploration, appraisal and development programmes, hence dilution features near the top of most investors’ list of concerns. However, a smaller number of companies have the opposite problem, namely lots of cash and equivalents sitting on the balance sheet but with no clear public programme of how this will be put to good use. In extreme cases some companies even trade at or below book value, implying there is almost a negative premium associated with management. In reality it is more likely to be a case of investors preferring to understand the execution strategy before handing over their cash. Cash drag on the balance sheet is certainly not a problem for everyone, but for those fortunate enough to have built a war chest it is an issue that both investors and companies need to be acutely aware of.
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