Oil-focused Trust-Protocol rewarding Investment Bankers to equally represent investors’ and issuers’ interests
— by Nazim Baghirov
The good old investment banking broker/dealer model of facilitating investments into various ventures has been an industry norm globally. There are currently various innovative attempts at challenging the traditional model’s market share in capital facilitation such as equity crowdfunding, which remains illegal in a lot of the major financial districts internationally to date, to peer-to-peer lending platforms. The latest iteration of such innovative initiatives like ICO and STO are also up there. I would not necessarily place ICO (Initial Coin Offering) into the same category as STO (Security Token Offering), as the latter is a complaint, less rebellious, and is being increasingly recognized as a financial security/instrument in key financial markets globally. Nonetheless, STOs very much evolved from ICOs which can now be called its predecessor that attracted the earliest adopters, the rebellious types, willing to assume all the respective risks associated with such innovations.
That being said, now that STOs are growingly being recognized as a legitimate alternative or counterpart of the other, established financial securities and instruments with claims to the underlying value, the challenger becomes less of an underdog to the current world champion. Especially after 100s of millions of dollars raised globally, in major financial markets of countries such as UAE, Hong Kong, Singapore, USA, Canada, and the UK, amongst many others. Why is this happening? Why do investors, large and small, individual and institutional-level, are opting for this new type of digital security? There are multiple compelling reasons that serve as an explanation.
Firstly, the traditional, well-established and widely accepted broker/dealer model of investment facilitation has plenty of disadvantages for the investors and the offering mandates. An investment bank is supposed to be a trusted middleman (trusted due to licensing and regulatory compliance, primarily), that equally represents and balances investors’ (network) interest and offering entities’ (client) interest. That implies parties on both ends trusting the broker/dealer the task of assigning a ‘fair value’ at which both parties shall transact. That further implies a lack of bias. Well, that function does not always represent fairness, lack of bias and equity. Any current or former investment banker could assure you in that, off-record, if he likes you and if he has enough alcohol in his system. A couple of pints of beer or two double-gin tonics should usually do it.
A property completed DCF (Discounted Cash Flow) valuation would arrive at the EV (Enterprise Value) and later at the Equity Value at the end of the process, as the outcome of careful calculations, various analyses, research, a myriad of conference calls with the management, educated estimates and forecasts grounded in micro and macro analysis. What often ends up taking place though, especially in specialized micro-cap to mid-size Oil & Gas and Mining deals, is the reverse of the aforementioned valuation process. Your senior gives you an Enterprise Value that he can currently sell and has a demand for, to work backward from. So you go back to adjusting the estimates, expenses and cash flows in a manner that would be somewhat justifiable at arriving at the predetermined valuation. Not even mentioning how super technical, convoluted and often undecipherable O&G reserve and resource (often 3Ps — Proven, Probable and Possible) based valuation processes are. Broker/dealers, among themselves, label the process of evaluating private companies “more of an art than science’. People with 10+ years of hands-on drilling/mining and/or technical background and experience could call you out on your BS or at least challenge your valuation but others? — Forget about it.
Thus why often very lucrative private Oil and Gas investments are usually split between a relatively small circle of investors, who are ready to reap the benefits. The return expectations from such deals are measured in “baggers’, speaking in investment banking and private O&G investor jargon. A bagger is a 100% ROI (Return on Investment). Thus investors in the space are looking for multiple 100% returns for the risk they assume, as these deals are risky. As some might have guessed by now, the ROI estimates, just like EV, are often ‘catered’ to the investor networks’ liking, showing them just what they like to see. At the end of the day, the deal has to sell and close to move onto the next one in the pipeline.
Speaking of investors assuming risk thus looking for sizable enough returns. Broker/dealers collected their fees in a form of monthly retainer fees, advisory fees, underwriting fees, legal and administration fees, as well as the success-based fees (often cash + warrant options) before the client sees a dollar of that investment. Obviously, these services cost money and need to be duly remunerated for. But some are often unreasonably high and add up. The pocket where these administrative and legal fees that are presumingly going into the pockets of third-parties, and not a broker/dealer’s, some time is the same pocket, carefully disguised. Conflict of interest much? I think so. I make 100s of thousands of dollars in legal fees from the investment regardless of it succeeding or failing on top of the success fee. Sweet deal. Please refer to the point of being unbiased and fair, trusted middleman representing both investors’ and clients’ interest above. But you will sign a bunch of disclosures, waivers, and consent forms in advance that release them of any responsibility resulting from future claims related to that. In fairness, you can disagree to consent and there will be no deal but as it often is the case, the client is too desperate for investment to keep the operations running and investors wittingly or unwittingly overlook these as it often represents not a significant enough portion of their portfolio, plus they do pay-off nicely from time to time. These are not to be confused with pump-and-dump or other scams, these are legitimate investment transactions that often render significant enough returns. Just sharing the process usually involved on the way to these profits. These costs and elaborate structures could have inflated investors’ returns or be the point of break-even instead of a loss from an investment in certain cases. As for the offering entities, this extra capital could have given them a longer runway and greater flexibility to concentrate more on the operations instead of looking for funding, and perhaps reinvest the capital more effectively which could then result in greater profitability and thus returns to the investors. It often is a snowball effect.
Back to the STOs, especially the asset-backed STOs that are more relevant to the Oil and Gas sector, and how they are digitizing proven reserves. The benefits are clear — much greater transparency and cost efficiency due to the crypto-economic model of transacting and blockchain-based smart contract framework. It is straight-forward without an opportunity to bury all sorts of fees and hidden interests in complex, legal lingo. It is a piece of encrypted code that automatically completes the task ‘B’ once the conditions stated in ‘A’ are met. It allows for greater liquidity as the security tokens are tradable while private investments aren’t. You don’t have to wait for an exit event, or at least not for as long as with traditional investing. The transaction fees are negligible compared to the traditional investment banking model. You don’t have to be part of a specific dealer/broker’s close network in order to participate in lucrative O&G exploration, drilling, and production investment opportunities. It is as simple as purchasing security tokens on an online security token exchange and trade it when you wish to do so. Or hold and receive a payout once the reserves are liquidated. The fact that these tokens are no longer unregulated but are securitized thus regulated and compliant with local securities laws and regulations, as well as the licensed exchanges that they trade on, removes the risk that used to exist prior with unrecognized by the authorities and unregulated ICOs.
As for the private Oil and Gas companies with proven reserves, it has never been easier, smarter and more efficient to monetize their reserves while pocketing much more of the proceeds from the asset ownership sale. More capital in the hands of an operator gives them more time, flexibility and scale to concentrate on operations and potentially achieve greater efficiency and greater returns for the security token holders. It is a win-win for parties on both ends. And thus why the traditional private Oil and Gas investment broker/dealers might be losing major market share to a more transparent, liquid and cost-efficient innovation as STOs.
Permian Holding company is a great example of an entity leading this initiative with their technology provider, PermianChain Technologies. They are currently offering accredited investors an opportunity to directly invest in highly lucrative Oil and Gas reserve drilling and production opportunities via their security token, the Permian Token (“XPR”), which will be release on its dedicated blockchain technology based platform, PERMIAN INVESTOR and it’s proprietary digital asset exchange, PERMIAN EXCHANGE.
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Find out more about the PermianChain and the Permian platforms at https://www.permian.io
