Oil and Gas Going to Shit...Effect on O&G IB?
Title pretty much says it all. What effect does this oil slump have on IB careers in the O&G industry?
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Overall, the industry is very attractive to banks for two reasons: O&G is incredibly capital intensive and project-based. In order for a firm to make money, firms need to first spend (raise) money. Because each well has a finite life, firms need to continue to drill new wells (which requires more capital). In order for a firm to drill a well, they must first own the acreage/mineral rights. This translates to repeat business for banks in the capital markets and high A&D activity as firms buy/sell acreage.
"Normal" levels of cyclicality in oil and gas commodity prices are actually good for banks because it stimulates M&A/Cap Markets activities, e.g. when prices are high, firms have excess cash for acquisitions, etc. and when prices are depressed, firms tend to divest non-core assets to create cash.
Obviously prolonged levels of depressed commodity prices and a bearish outlook on the industry is not good. If this slump continues, there will likely be a large slowdown in capital markets activity in the upstream vertical (as it is increasingly less economic to extract hydrocarbons) and overall slower M&A activity due to lower cash flows. These factors obviously hurt banks who primarily provide these services. E&P companies with higher breakeven costs and OFS companies will be hit the hardest; the lower cash flow stream might cause them to violate covenants, default on interest, etc. which leads to increased restructuring deal flow for key banks.
There is a shift in strategy in the O&G world. E&P companies are focusing on generating free cash flow rather than production growth, which means they can fund more of their operations internally. That is the goal at least. And that means less capital markets activity. M&A goes hot and cold, but if the industry is crap, that will decline as well. O&G was a honey hole for bankers for several years (2010-2015), deals deals deals, both M&A and cap markets, now it's coming back full circle. I think we are learning that shale companies generally don't create any value with crude $60.
Spot on. The best plays have field level breakevens in the high 30s low 40s , add in land costs and take it to the corporate level and you are losing money.
The best rock has been drilled up or has parent wells in place with degradation to follow (some tier 1 areas will see major degradation, others should be manageable.) Completion design has likely peaked with major operators like PXD retrograding their completion designs after pushing limits of sand placement.
PE has thrown so much money into this system that there are too many shale companies, too many shit management teams running them. There is no public market exit (used to be a problem for gas players, now its all players) and the private money is stuck with a buffet of portcos that they cannot sell and cannot merge unless someone blinks on valuation and takes a loss. At recent 60 dollar oil, you could stomach some div recap deals for the right companies, now even that option is toast. I guess we see another round of restructurings, more zombie co's and some M&A of higher quality companies. The institutional money for PE will have to say no mas at some point and stop this nonsense.
This guy gets it. Whoever is throwing monkey shit is just not there yet. I think there is one public (non-major) E&P I'd own right now with confidence.