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Running in the
Red...
When real oil companies take on too much debt, they lose
opportunities as cash flow is directed to keeping their bankers happy.
Loss of opportunities also happens in OilFinancier when a financier
spends too much money. This condition is known as "being in the red."
Any financier is allowed to spend as much money for
oil rights, drilling rigs, or wells as he wants―even if he doesn't
have all the available cash. When he spends more than he has, the
unpaid portion becomes a loan that must be repaid with future cash
flow.
When a financier is in the red (i.e. having a negative cash balance
on his cash flow sheet
because he has taken on this loan), he loses
these opportunities to participate:
Only when the financier's account returns to the black can these
opportunities return.
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Running in the Red
. . .
. . . does cause a little public humiliation in the
OilFinancier seminar. But it is not necessarily a bad
thing. Borrowing money to get certain things done in a
timely way can have a big impact later.
And occasionally going in the red shows the
financier is putting his money to work, not sitting on
it. |
However, running in the red does not remove all opportunities to
participate. A financier who is running in red ink can:
- enter into a new oil-well drilling agreement if he is just contributing
his oil rights or drilling rig,
- sell or trade non-cash assets,
- vote in a joint venture proposal if he is not the leader.
As well, running in the red does not preclude or release the
financier from these deals :
- A financier had a positive cash balance when entering into a
multi-well deal. But after the first well, the financier goes into
the red. In this case, the deal for the subsequent well shall proceed
as per the terms of the agreement. The financier shall go further
into the red.
- A financier who is in the red and his joint venture—in which
he or she is not the JV leader—proposes to drill
a well. Such a financier can still vote "yes" or "no"
to the
proposal, but if the joint venture decides to drill the well, the
financier shall be obligated to pay his share of the cost
as per the joint venture agreement. The financier shall go
further into the red.
- A financier who makes a deal for a well which is placed on a
contractor's list is still obligated to pay for that well when it
is spudded. If the financier is in the red on spud date, he shall go further into the red.
There is no limit as to how far a financier can go in the red. For
example, he may have only $1,000 in cash account, but he can
still form a partnership that stipulates paying 99% of the cost
of a deep well. Such a deal will put the account about $350,000 in the
red, which means it will be a long time before climbing back into the black again—even if oil is found.
Another reason for keeping yourself in the black is to take
advantage of exploration subsidies that
may occasionally happen in OilFinancier. If you have a positive bank balance and a good
relationship with some other financiers, you can take advantage of
these short-lived deals. |
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