Oil/Gas IB and current WTI
very interested in anyone’s insight on the recent WTI drop and their respective bank’s outlook. looking specifically to the oil/gas coverage groups but all energy/power would be great.
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DCM/ECM/M&A=screwed D&A=OK RX=Making $
what's RX
Restructuring
Why try to make people panic, no not that many people are screwed. We are talking about oil here, prices go down- means cheaper oil for everyone. The only possible issue is if its SO prolonged that it literally takes down massive oil companies in the US (highly unlikely) THEN there will be effects in the credit markets which may impact other areas to a degree.
If you're in an oil/gas M&A/Coverage/Capital Markets roles then there might be a concern. As for other industries it will be fine.
dude, read the post title
Lolz at the current pricing environment being "highly unlikely" to take down large domestic E&Ps. Did you miss the large domestic E&Ps that filed in 2019 through YTD 2020 as a result of a pricing environment where oil prices were over 2x higher than they are now? This industry was already on the edge of the cliff, so there didn't need to be a pricing down-turn that was "SO prolonged" for it to fall over. Ffs', without a recovery from February prices in the next year there were already going to be a litany of filings.
This isn't even considering the OFS companies who are equally or more fucked as capex is slashed to sustenance levels?
Headcount reductions 30% across the board is likely. Liability management and RX will do ok. No capital markets activity, industry will shake out and consolidate but after that very few new companies will be formed. 1 or 2 new oil and gas PE funds may be raised, not 20.
It’s very bad
any insight to new hires/return offer rates the next year? or has that conversation not really started (different from today’s oil drop but a recent downturn was likely anyways)
Deleted.
The price slashing is scary but not new. Every now and then OPEC decides to rear it’s ugly head.
2014-2016 was one of those times and isn’t too far removed from us. Here are some reads to see how things shook out with industry M&A then.
Overview of what happened: https://blogs.worldbank.org/developmenttalk/what-triggered-oil-price-pl…
M&A activity 2015: https://www.ogj.com/general-interest/article/17249751/deloitte-global-o…
M&A activity 2016: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-reso…
The M&A activity at that time was no where near as bad as it is today. This era of oil and gas is different from the last downturn because it is hitting in every possible way, I.e. no capital coming in, horrible valuations, and pricing downturn as well.
The concerning differences to previous downturns is that right now we have an oil market problem (price war) AND broader capital market concerns. In previous downturns it has been one or the other, but never both at the same time. We could be in for a ride here. I wouldn't take anything off the table of possible outcomes yet. Stay tuned folks!
Agreed (currently work in oil and gas) and this is a very different downturn than 2014. Back then we as in industry were mid cycle meaning we had room to go up. Saudi's decided to tests production limits and ended up pushing crude below $30 in 2016 but we did not have fundamental problems with companies' balance sheets, a pandemic bending us over, and a big dick contest between two of the world's top 3 energy producers. Then it was a supply glut fixed by OPEC+ cuts. Fast forward to 2020 and we have all the problems I listed above. As many people are mentioning, RX will be the most promising division in EB as companies have massive debt loads that mature in 2020 and 2021 in which they will default on due to sub-par cash flow generation stemming from poor full cycle economics that did not match commodity prices. I read a report today stating energy makes up 11% of junk bonds in the US which is absolutely wild/terrifying.
Is it safe to assume EBs like Moelis, HL and EVR with restructuring capabilities will be doing just fine going forward? Should incoming SAs be worried about return?
Rx/SS be like
I imagine EB groups in Houston O&G will get a good amount of restructuring work and be fine. It is also possible that Saudi Arabia and Russia come back to the table in April and realize neither can handle these low prices. They will agree on cuts, each taking a bit of the hit, and oil will back at $40+ by summer. That being said, a lot of shale E&P companies are gonna struggle at that price and the industry will likely see another round of bankruptcies. Hope not though.
Shale wasn’t making money at $50, they need $65. There is an insane amount of excess capacity in the system particularly on the finance side. Need to shrink A LOT regardless of what OPEC decides to do in 6 months
AFAIK E&Ps in the Permian were making money at $50....
Any thoughts on how the crisis might affect corporate banks (and bankers) in Houston?
Presumably, some of the smaller, weaker E&Ps are going to go bankrupt, which might lead to defaults on loans. Could this hit to the banks be partially offset by other factors--e.g., by stronger E&Ps (or midstream groups) seeking new loans to support their operations over what they hope is a temporary downturn in revenue, or by bigger companies taking on debt in order to acquire new assets that struggling E&Ps are divesting themselves of?
In sum, is there any silver lining here for the corporate banking divisions, or are they looking at a bloodbath--with a commensurate degree of downsizing and job loss?
Leverage levels post shake out will have to be smaller, like 1x ebitda. Issuing debt for acquisitions will absolutely not happen.
Secured debt (RBLs) is getting smoked. It’s hard to see how lenders can continue to lend to anyone and everyone so it will likely get much tighter with some banks pulling out from energy lending altogether.
Some shale E&P’s hedged at $55-$65 which is near break-even, co’s that didn’t will see layoffs, M&A, and/or bankruptcy if prices sustain sub-$50.
as someone looking to go this route post mba, can anyone explain a little deeper why ECM, DCM, and M&A are “screwed”? ECM/DCM I would have thought these companies would need to raise funds to weather the storm. clearly I’m not understanding. perhaps they’ve got too much debt with a poor outlook ahead. M&A- I would assume over the next year or two there would be a prime time to poach companies.
Which investor is going to want the bonds/shares of a shitty E&P company that cannot break even on a barrel of oil?
Same thing applies to M&A - how will a company raise funds for an acquisition? Unless that company has sufficient cash on hand, no seller will want stock either.
Yup that gives me my answer. I understand now. Thanks.
Don’t go this route post MBA...
In the industry and I am terrified. A few key points that made for a sleepless night:
The overall economy in Houston has done well with diversifying but that definitely needs to accelerate. And finance in general in Houston may be dead in the water within the next few years, it seems.
this has me very concerned. I’ve been wondering what Houston finance will look like 5 or 10 years from now.
People say it's diversified- it's not. You really think MD Anderson will be enough to prop the city up when everything else is crumbling? The city is built on oil and that's clearly going to be operated at a much smaller scale going forward
A+ spot on. #1 and #4 especially. O&G is a very complex field and a lot of the people throwing money around don't fully appreciate that.
It is possible that the incoming full time analysts get cut?
Work for an o&g boutique in Htown. We just suspended all our recruiting efforts for the summer. Some friend's banks are still going on, but others have suspended as well.
Are incoming summer analysts at risk? Will there be a lot less return offers at places with RX platform like LAZ/MC/HL/EVR?
Somewhere some analyst is having a nightmare of negative oil prices Crazy times
Not saying oil isn't in the gutter here because it is, but only spot is negative. It's not like we are in backwardation here.
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