Future of O&G IB in Houston

Posted my reply below to another thread for an incoming SA but the logic should still apply.

Current analyst in O&G, but would consider myself as bearish on the industry. Oil has always been known as boom or bust, but in some ways I see the U.S. industry against the shot clock of peak oil demand in the next 10 years and entering a secular decline.

The negative shift in investor perspective on fracking (demanding cash flow generation) has only been worsened by the SA/Russia supply glut and Corona demand declines in the last few weeks. This all came to a peak when oil dropped into the $20s two weeks ago, and we watched companies that were $1-$2bn market cap at the beginning of the year became $150-$300mm in a flash. The investor sentiment has shifted to classifying companies that can either transition to low-carbon alternatives or generate cash as the industry declines (cigar-butt investments).

Shifting to direct impact on IB, there will be plenty of near-term restructuring work for the EBs that operate in the space, debt deals to ensure liquidity for the bigger players, and eventually consolidation via M&A to survive. However, on the M&A side, these expected deal equity has contracted in size by ~50-70% due to the current environment which would also reduce the fees as expected. I see down sizing of non-restructuring teams as inevitable, however happening more-so for the VP/Associate teams since Analyst are cheap and short term.

That said, this will be an unprecedented summer with potentially a WFH structure or reduced office weeks. Would be extremely nervous to be an incoming summer associate due to shift in the last few months. For SAs, I could see a reduced return offer rate for the larger classes or more focused-EBs (A&D shops or OFS focused). I saw this occur last summer with an firm that dropped return offers to ~60-70% when the precedent had been 100%.

If I was an SA, I would do some deep thinkingand at the minimum have an idea of a contingency plan. Obviously being an analyst in 2021-23 will be a different experience from today, but if you are looking at the value destruction that has occurred in the industry, it is difficult to provide catalysts for the U.S. to return to the glory days when oil was $100. I would also consider the exit opportunities, which are mostly energy PE, that would also be downsizing or disappearing in the next year. Look at the recent struggling fund raises in the space or Warburg canceling their second energy fund. It’s just hard to say the options will be there.

Overall, I would just focus on what you can control. That would be (a) how you perform in your internship to secure a return offer and (b) laying the ground work for a back-up plan or relocation.