The operational success of many independent oil producers has led to rapid growth. Many smaller firms, while remaining good "oil finders," have difficulty maintaining control and direction during this rapid expansion. The recent weakness in petroleum prices and demand has emphasized the fragile financial position of many independent producers. Recognizing the need for planning and financial controls can prevent serious financial problems from developing.

The independent petroleum industry represents a unique financial situation that influences appropriate planning activities. It is capital intensive with most independent operators working in a capital rationing environment (more acceptable investment opportunities than available capital). At the same time the special financing approaches used by the industry may provide financial leverage while actually reducing the risk of the operator.

The operating characteristics are also unique, resulting in high operating leverage. As with all high operating leverage situations, petroleum production has relatively high fixed costs compared to variable costs, creating high profit margins on incremental production. Earnings and cash flow will be sensitive to both volume and price changes. However, there is also the factor of exploration success which can result in even greater changes in production volume and therefore earnings. A relatively small change in exploration success, either in number or quality of discoveries, would have a substantial effect on the smaller producer. Manufacturing and other traditional industries do not have this unique characteristic.

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