Lorusso:  The technology in the energy sector is evolving quickly. What we try to be mindful of when we finance something is whether there are potential advancements that are going to affect our future collateral value. It's difficult to predict what the advancements in technology are going to be. The equipment we finance and the transactions that we're involved with are of a scale and scope that would not be immediately affected due to the long lead time for capital intensive equipment. We have a short payback period to mitigate the duration of our exposure. The advancements in fracking are occurring rapidly, but they're occurring at a smaller-scale level.

So, for example, new drill rigs are being constructed to drill deeper, longer wells more quickly than they could previously, but once those rigs are put into service they will operate for 10 to 20 years. We are primarily financing this type of equipment with a short payback period to reduce the uncertainty of change. Improvements to the drilling fracking process occur mostly on a more micro level. It's not so much the change to the rig but the change to components and processes utilized by the rig. While we may not be financing those components, the rigs we do finance will utilize those components. 

Our approach has been to take a higher-level view as to the direction that the market is moving in and within a shorter horizon to finance the newer generation of equipment that's replacing the older generation. We believe that any advancement in technology will be at a micro level that we will benefit from as they are brought to market. We believe that the equipment we finance is not subject to the more instantaneous changes that may occur in the marketplace; rather, our financing is consistent with the trends that we see the advancements in technology going.

Equipment Finance Advisor:  Private equity players have demonstrated interest in the energy sector for many years. How significant of a role will private equity investors play in the financing of equipment utilized for both the exploration and production of natural gas via fracking? Are these private equity investors competitive players for a company such as CIT Energy?

Lorusso:  Private equity is a more recent player within the energy space, specifically oil field services, exploration and production. Over the past few years, private equity sponsors have seen the upside potential in the energy market, and as a result, have been increasing their level of investment activity. There were, of course, private equity sponsors that have been focused in energy for some time and have benefited in the early stages of the success in advancements here in fracking. Recently, more generalist-type equity sponsors that have not been so involved now see the opportunity for continued growth and are coming into the space. In doing so, they're also allowing for continued technology advancement because they're putting new capital to work and looking to put additional capital to grow the platforms that they're investing in.

We view this as a positive, especially with the private equity sponsors that we have strong relationships with. We're a beneficiary of their efforts as they acquire small private companies. We see that as an opportunity for us to finance their acquisitions, as well as the additional financing that’s needed as they make capital investments to grow these companies. 

Equipment Finance Advisor:  What is your outlook for the fracking industry over the next five years? Do you anticipate this industry will create a significant equipment financing opportunity for commercial finance companies in the U.S.?

Lorusso:  The outlook is very positive. One thing that we are certainly cognizant of as we proceed with financing is the cyclicality of the energy industry. We’ve seen a run-up in oil prices, then a decline, then a run-up again and now it’s plateaued. These cycles and the commodity price of gas and oil affect the level of activity in drilling, production and related services. So, we're very cognizant of that as we proceed with financing. But right now we see a very good trend towards continued growth and level activity over the next five years. 

U.S. production has been increasing about a million barrels of oil per day over the last couple years, and we see that continuing for the next few years. Production increases are a result of more drilling activity and more wells operating. All of this requires servicing, equipment and technologies to support it.

We see this trend continuing for the next three years and probably at least five years. It could level off at that stage, but certainly in that near period of time, it's a very positive outlook.