I’m really interested in O&G, and I think the industry is due for a boom in the coming decade.
Not here to debate the ESG movement, but what’s the best way to get exposure to the sector while also hedging my bets and not going all in on O&G?
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The only way you should think of doing O&G is IB to HF. PE LPs are out on O&G and it’s highly unlikely they come back. There are a handful of funds actively investing in O&G (Quantum, EnCap, NGP-ish, plus some smaller ones) but the game has totally changed.
Historically (as in the 2013-2019 PE boom) it was about leasing up virgin acreage, drilling a few wells to “derisk” it and then flipping it to some public company. Works great when the public markets are communicating that the industry should grow at all costs. Well that inevitably started to end around 2018-2019 and then came to a screeching halt in 2020 when everyone had to cut activity and focus on surviving at super low commodity prices. The private-to-public A&D pipeline completely dried up and didn’t come back until really 2022. Many private operators had put a lot of money (and debt) into tier 2 (and worse) acreage and 2019/2020 forced a lot of assets into bankruptcy and PE funds had to take bad marks on assets they had otherwise been communicating were fine. Compound bad returns with ESG pressures on pensions and endowments and its easy to see why PE can’t raise a ton of money around O&G.
Fast forward to mid-to-late 2021 and the remaining public investors in the E&P space told the E&Ps to max FCF while keeping growth flat to slightly up and return cash to S/H. No stupid deals to acquire acreage that maybe competes with what you’re drilling. The message was received load and clear and the early adopters were rewarded. Fast forward another two years and we’ve had massive spikes in commodity price related to domestic s/d imbalances plus international unrest and most everyone is living within cash flow, even the gas E&Ps while gas is currently on the floor. The A&D market has come back for quality assets but inventory depth is now coming front and center, and generally the remaining private assets won’t extend the runway that much, so it’s not clear to me how funds will get out of lesser assets other than long holds and dividends/maybe ABS. Inventory depth is going to create some real divergence in public company performance over time so that space should remain investable for the next decade-ish. And the beauty of being a public investor is that you can pick up another sector much more than easily than a PE fund can shift their mandate.
So all that is to say that there will still be assets sold by IB over the next few years and there will still be a few PE funds putting capital to work but investor pressures and asset quality will be problematic private markets. There will certainly be some be very interesting and lucrative opportunities that come up since so much capital has fled the space, but today it seems hard to see the path where Capital floods back. Contrast that with public markets where capital has flooded back in the space and there are a good amount of LOs that want to get in but are a little hesitant and the opportunity set is much better if you want to invest in O&G for a good portion of your career.
For a “hedge” I’d say look at infra/mining. Not the exact same work but very similar
Work for an infrastructure fund. Do not work for an oil and gas PE fund under any circumstances
Agree - anybody who is an associate or VP at an oil and gas PE fund is in a dead end job with a huge comp cut once they leave their current seat
Not arguing but can you elaborate? Serious question, I'm not familiar with the economics of the space and why it's a bad idea.
Pretty much every oil and gas PE fund got burned badly in the last downturn or two, to the point that many are gone with only a few somewhat large players still around - and go look up their latest fundraises, it's honestly generous to even call these guys large anymore.
It's a boom and bust cycle, but the busts absolutely kill PE firms. Many PE firms went belly up and even more of the MFs/large-scale money are out of O&G on both profitability and ESG concerns. I've seen many guys with 5+ years of top-tier experience in O&G PE really struggle to land something when their firm shuts down.
I agree with other comments that infra PE is a wiser career play with more longevity, players and optionality in general. Infra is similar work, really no boom and bust, and some infra firms do midstream O&G projects. Also due for huge growth in the coming years. You can get there from O&G IB (P&U IB is probably the best spot, but O&G will get looks too)
Isn’t it if everyone is saying it’s a terrible place to invest long term right now, that makes a great place to invest right now? A lot of these arguments seem like they could have applied to tech post 2001. A lot of the big VC and tech firms that managed to survive 2001 did phenomenal in the decades after.
O&G may not be a huge growth energy like in the past but there’s always potential in mature cash flowing industries. If you assume that oil producers don’t overproduce for the near future and continue to maintain FCF levels, then that sounds like a decent LBO play (may have issues with CapEx) and you can hedge risks by having a portfolio of energy producers at different financial leverage points.
OP here, the main issue is that nobody will lend to these otherwise strong companies bc of this ESG stuff and regulatory headwinds. That’s really the root of what everyone’s talking about. If all that ended tomorrow then there’d be massive capital inflows and huge interesting opportunities in the space. Though i think the market will come to its senses at some point, i’m not willing to bank my entire career on the downfall of the Democratic party.
There’s still a lot of lending in the space I’m not quite sure what you mean.
Maybe bigger opportunity for private credit?
There's TONS of lending in the space, and if it were profitable the PE guys would love to stick around. Sure, the energy companies look great right now with 2 years of $70+ oil... but outside of that best case scenario price environment, the bottom line is that oil and gas companies do not reliably generate FCF and it's proven unprofitable to be in energy PE.
Some real governance issues you don't see in other industries too - not just flimsy "ESG" concerns, but straight up self-dealing... things like management bonuses being dependent on barrels of oil produced rather than FCF or shareholder return (so in a downturn they're highly incentivized to keep pumping unprofitable BoE). Sure, energy cos are chilling right now with high oil prices.. but in 2020 (and a few years prior) PE firms got taken to the cleaners and it had nothing to do with ESG or Democrats.
There are plenty of independent, Texas-strong, non-ESG firms that have either just collapsed or pulled out of energy and pivoted to infra or clean tech because they got taken out back and shot by the energy industry in the last few years.
Look, I see your type a lot - I get you are likely a Texas kid who loves energy and potentially has parents in the space. But there are real reasons PE has fled the space beyond just ESG, and if you go into O&G you should be aware of the industry landscape instead of just pointing it all on politics
Quite the opposite. We are in a golden age of O&G IB/PE.
Yeah that’s why DB and BMO completely closed their offices. And a few more banks are right behind them.
fake news. No one is closing shop in today’s golden age of O&G. DB and BMO closed shop many years ago.
That’s not applicable at all. Those office closures were years ago and all the institutional money and firms pulling out of a critical industry is part of what is creating a potential opportunity now
Any LP that dumped energy exposure under the guise of ESG should be removed from their position by their beneficiaries as they would have missed out on one of the best performing asset classes during this inflationary period.
OP - any energy bank worth their salt will have an energy transition group and you should be asking whether or not that is covered out of the same office. General O&G banking will provide you with the optionality to go infra. If you cover OFS you have a shot at industrials. If you cover ET as well, then I'd see it as having many doors open to you if O&G does not look great :)
Oh and btw capital starvation creates a vacuum. Just because someone sitting in Boston says they won't invest in oil & gas does not mean a marginal dollar won't find its way in. Crude is going nowhere for a long time, you might just have to be more creative in looking for seats that will be putting money to work.
Some O&G people are so sensitive, mention of ESG and they start ranting. The reality is anyone entering the space needs to have eyes wide open that one day “demand destruction is coming” and the same “technological evolution that created shale” will replace it one day and then demand really comes off. The moment demand comes off the financing space will change.
More and more niche players will form and specialize. Look up venture global, doing on it their without any major MF muscle behind them. The space just does not make sense for tons of MF deals, we do not need another Pioneer etc..
As many mentioned already, “energy transition” is very similar to O&G it is not magic sass models, high growth etc..It still commodity driven with major upfront costs and payback period. Know friends in PE who will never look at another O&G deal but they see the paybacks on a solar farm and go wow and then see it’s basically the same business.
I’ve done both in my career and in both private and public (currently public fwiw). I somewhat agree but renewables have a lot of the characteristics without the massive up/downside of commodity price. But at the end of the day for a renewables developer, you’re taking a riskier, earlier stage asset and trying to de-risk it and compress the discount rate so you can bridge a low double digit levered return into a high teens IRR. Similar to migrating PUDs to PDP (ignoring the leverage bit). The massive difference is that renewables are for all intents and purposes a fixed, infrastructure return whereas well declines mean that you’re dramatically accelerating your payback period (while getting a much smaller ROI over the life of the well). And while renewables ops are much more set it and forget it, you’re highly unlikely to beat your underwrite since things always go wrong and there’s rarely much margin for error built in.
As someone that very recently made the transition from O&G PE to HF, yes. I would not start a career in US onshore-focused PE today. HFs are interesting and there are plenty of dislocations in public markets but you’re seriously limiting yourself in PE. A&D landscape is dead. If you’re a private, what are you going to do? Buy a public’s fringe ~$60 b/e acreage then flip it back to a different public in 2 years? Stupid business model…
I have by own views but curious to hear your thoughts on the duration of privates ability to fund acquisitions outside of traditional PE capital? Think FOs step in here? re-emergence of pure natural resource allocations at LPs (direct investing)?
I agree buy and flip is not a viable strategy under a 2/20 any more but I am hearing things about structures aligned for longer term operations but still allowing liquidity events. My view is either traditional PE changes its structure to align with that or funds that dont > underperform next trough > gone
Why would any smart LP invest in private equity when they can get de-risked, unlevered, tier 1 acreage trading at >15% FCF yields with well defined capital allocations plans? With the bonus of liquidity / being able to put their capital to work on day 1, not waiting for their capital to be called.
As a starting point its great to know what you want even against a headwind of public opinion. I largely would ignore most of the voice on WSO and their career advice - many are just useless and downbeat opinions of teenagers/interns/career starters that have a complete disattach with reality and lack material substance.
As a starting point, I do think most of the ESG stuff as a headwind for Oil and Gas bankers is overstated, Oil and Gas will be here for most of our life time/careers albeit I do agree on a "reduced form" but hey...in a way thats exactly the theme that makes the sector one of the most interesting and transformational sectors to be involved in. In terms of activity, M&A in the space is booming, look at all the recent deals as well as exploration successes in UAE/Saudi, Guyana, North Sea and Sub-Saharan Africa for example. Theres a lot of billion+ deals that are still ongoing and expected to close in 2023 and there will be an inevitable wave of consolidation that will come around again in the near-term regardless of where Brent/TTF/HH are trading at. Direct lending (Traders/HF/Private Credit Funds) as well as bank lending (to a lesser extent) in the sector is still a sexy place to be. ECM is perhaps the least sexy part at the moment given most of it consists for raising for cash-strapped exploration juniors (unless you are doing mega deals in Saudi/UAE) who dont have access to the debt markets just yet but sometimes those scrappy deals are the ones you learn the most from and can be exciting...
If Oil and Gas is something you are interested in but want to "hedge your bets", the best advice is join energy coverage teams that provide diversified exposure across the sector with guaranteed exposure into other sub-sectors within broader energy including midstream and infrastructure, tech and services, renewables and even shipping/logistics where at least you have a broad based skills and knowledge across the board. As a junior banker, I think many people here overstate the importance of specific sector knowledge, your main priority is to understand the skills of an investment banker first and foremost; this also means your focus is on learning your products and how to manage the process in M&A, ECM and DCM transactions. In my team we work on a lot of "traditional and conventional" Oil and Gas deals but we also look at Biomethane and Biodiesel, Helium (industrial and space uses), Geothermal (very similar to drilling to Oil), Hydrogen (used as a form of energy/transporting green energy), as well as loads of tech (sensors used in oil and gas but also mining/geothermal etc) and services (OFS's like Halliburton and Schlumberger also work across the energy spectrum). I really do think skills learnt in Oil and Gas IB is not in a vacuum on a silo thats ready to die into the sunset tomorrow.
In terms of exit opps, I would keep a very open mind - I would definitely consider the principal investment arms of commodity traders like Mercuria, Gunvor, Vitol, Glencore, CCI etc who are very much active in oil and gas investments but also have substantial decarbonisation/energy transition investment mandates. Corporate development/M&A is also a good option. If you look at most of the majors, if not already, most of them will transition into fully diversified energy companies within the next 5-10 years. Most of the Sovereign Wealth Funds have energy focussed arms that make a compelling career option also.
If you want to have a chat, do DM me and always keen to connect with those who want to learn about the industry.
terrible advice - Lots of words, though.
your advice to a USA / houston group of energy bankers and prospects is to “not worry bc of Sub-Sahara Africa oil and gas deal activity” or the optionality to “move to a different continent and work for a SWF”
delusional. You proved everyone else’s point about the issues of staying LT in oil and gas. There’s also no thing as a mega energy coverage unit that covers oil / gas vs. energy transition vs. power completely in one team or office
still laughing you quoted sub-sahara Africa deal activity as something relevant for US coverage groups.
Ya I mean, working for a trading house or SWF is a great way to get exposure to energy investing. Those are also pretty highly coveted seats too. Weird deal.
everything you post here is stupid as fuck
Hey look it’s the Ohio state guy that keeps following me. Glad u have notifications on for my posts.
did you not get the BGL offer? Good luck out there buddy. Not sorry GS canned you - team is doing well btw
Yes I’m delusional… my team covers all of those sub -sectors and geographies, happy to send you my creds book. Plenty of teams/banks here have pan-energy groups. So maybe realise US isn’t the center of the world and leave to widen your perspective - my advice isn’t catered for solely Houston guys and clearly I’m talking from an EMEA lense if you were paying attention.
The sad truth in the US is that houston groups for the most part are blocked from covering the largest and most actionable side of energy - power and renewables. Sure houston covers bs sectors like hydrogen and renewable natural gas but those won’t pay the bills for some time
Ah fair - interesting as didn’t know it was more of a silo over there. How is Houston as a place to work generally minus the booms and bust of oil and gas cyclicality?
I enjoy it, I managed to move out of oil and gas years ago to broader infrastructure. But I think I’m one of a handful of people in Houston that isn’t tied exclusively to energy
Midstream dealflow is only expected to increase. See recent Oneok / MMP merger.
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