Escaping the ‘Valley of Death’
However, ANE finds now itself in what is known as a ‘Valley of Death’. This description refers to the fact that while the UK has one of the most enabling environments in the world for angel funding, once £5 million has been raised – the annual Enterprise Investment Scheme limit – the company is too big for small angel investors, but too small to attract institutional investment where less risk is tolerated.
- Strategy
- Real Madrid C.F
- 24/11/2017
- www.giorf.esp
Companies from every sector face this problem, the oil and gas sector is by no means unique. Where the oil and gas sector finds life to be challenging is the fact that it requires vast amounts of capital to become cash flow positive.
With international oil prices falling from a high of $127 in 2013 to a low of $27 in 2015 – leading to a situation in which 60% of US rigs lay idle – sentiment towards the sector is negative. With oil prices recovering to more than $70 a barrel by mid-2018, this sentiment is slowly beginning to change.
ANE faces a further challenge that is specific to its circumstances. It is using technology that institutional investors do not understand, and drilling in a location that is more than 1,000 miles from the nearest proven hydrocarbons deposit (Mozambique). Its team are mathematicians rather than geologists, so institutional investors would find its offering beyond their mandate. If ANE is to succeed in finding oil and gas, it first needs to succeed in finding an unconventional funding mechanism to fund its targeted 10-well drilling programme.
ANE is proud of the fact that it has tapped investors for a minority of the funds that have been invested in the exploration programme and technology development to date. In fact only 29% or £2.5 million of the £8.6 million raised so far has been from crowdfunding investors. The rest has been funded from the owners liquidating properties, grants, research and development tax credits, grants, sale of intellectual property and consulting, and skills swaps.
For every £1.00 raised from EIS investors, the company has sourced £2.44 from other sources. Apart from high corporate finance costs – which are unavoidable due to the highly regulated nature of fund-raising, the technology has reduced costs. Peter Hutchinson, the former chief geologist for BP North America, estimates that a typical exploration programme involving traditional seismic-dominated approaches would have cost $50 million to get to this point, with lower probabilities of success.
