HOUSTON (Reuters) - Would be wildcatters and investors hoping to strike it rich in oil can now turn to crowdsourcing, a way to raise money more synonymous with aspiring filmmakers than roustabouts in West Texas.
Equity crowdfunding, or raising capital directly from a large group of investors, is widely used for projects from technology to fashion. Now, at least two small Texas firms are testing the concept in the oil and gas industry.
Potential prospectors, hoping to tap into smaller projects that big banks would normally pass over, are taking advantage of recent federal legislation that allows crowdfunding by for-profit companies.
EnergyFunders, a tiny 6-person firm in Houston, has signed up 800 investors since its unofficial launch in July, around the time crude prices started a 50 percent slide over the next six months.
“This allows small oil and gas operators to get funds when large institutional investors are turning away from the industry,” said Philip Racusin, chief executive officer of EnergyFunders.
Its system, like that of another Texas-based startup, CrudeFunders, is web based.
“Capital has been raised and invested directly into oil and gas projects for over 100 years, we’re just taking it into the 21st Century,” Racusin said.
It is too soon to know if the alternative financing vehicle will take off for oil wells as parts of the Jumpstart Our Business Startups (JOBS) Act of April 2012 are still being put into effect.
But traditional energy lenders and finance experts said crowdfunding would probably amount to little more than a niche product.
Christopher Ross, a former BP Plc executive and today finance professor at the University of Houston’s C.T. Bauer College of Business, cautioned that directly investing in oil and gas can be tricky for investors unfamiliar with geology, drilling technology, and the arcane world of mineral leases and royalties.
“I don’t want to pour cold water on what might be a valid new source of funding, but from the investor’s point of view I would say a very strong caveat emptor (buyer beware),” he said.
For its part, EnergyFunders posts reams of data about projects, including lease information and seismic data, for investors on its web site and targets patches with older wells that could benefit from work to boost output or in some cases new wells.
In exchange for investments that range from a few thousand dollars to $50,000, investors receive equity in a project. EnergyFunders takes 10 percent share of a project’s profits.
In early January, when the price of crude hovered around $50 per barrel, EnergyFunders raised more than $200,000 in just six days, enough to fully fund a 16-well oil project north of Dallas in Archer County, said Racusin.
Scott Morris, a 57-year-old Web marketer based in Austin, Texas, invested $5,000 in the project.
He is due to receive his first dividend at the end of April and is looking to invest in other projects.
“With oil at $50 (a barrel) or below, it’s the perfect environment to get our hands on these,” said Morris, who is hoping crude prices will rebound and bump up his dividends.
Morris, who said he was not risk averse, learned about EnergyFunders from a friend and drove up to the oilfield to check it out.
Potential projects are assessed at various prices and a recovery in oil prices will open up new fields, said EnergyFunder’s Racusin.
Rival CrudeFunders has used the drop in oil prices in its marketing push, saying it is best to buy into a notoriously volatile commodity when prices are low.
“It’s a great time to invest in oil,” said David Taylor, CrudeFunder’s CEO. “You aren’t paying overheated prices.”
Editing by Terry Wade and Tomasz Janowski