Comments (78)

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  • Analyst 1 in IB - Cov
Mar 28, 2020 - 12:55am

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.

Mar 31, 2020 - 1:21pm
LeonTree, what's your opinion? Comment below:

Supermajors are a safer place to be due to the integrated and global nature of their businesses, absolutely. In times like these, they can profit greatly from their trading arms - so if thats what you mean by finance career. If you are talking about more of a corporate finance / M&A / A&D / FP&A, I would have some hesitations about the long-term personally...

The oil and gas market is broken, and without a dramatic change in the demand curve it looks fundamentally impaired. Seemingly overnight (really 2018/2019), it moved from being a growth industry to a dividend industry. Being in oil and gas finance isn't what it used to be.

The super majors have some long term upside with their investments in renewable power and alternative energies. Though the return profile there is more akin to other power segments and infrastructure, so its still a dividend type industry. Economic theory says over the long term, profits reduce until only the cost of capital is returned, and I think we are there in the energy sector.

Apr 7, 2020 - 8:45pm
googlingbanker, what's your opinion? Comment below:

Do you know how the current stage of O&G will effect coporate banks in Houston? I'm interning for BMO Capital Markets and was wondering if corporate banking could suffer from the low oil prices as well.

Apr 9, 2020 - 7:01pm
Premia, what's your opinion? Comment below:

Of course, there are so many companies that will downsize their RBLs. The value of the entire industry has declined so even if you are ultra senior in the capital stack the size of the facilities will drop too.

Array
Mar 29, 2020 - 4:57pm
UBSnolongeraBB, what's your opinion? Comment below:

I want to make sure I stay away from comment on return offer rates and the like because that's ultimately something very serious and something that I will be totally guessing. Take in all of the information I've said with a grain of salt rock because my family has been involved in the industry for some time now and I am clearly biased

  • Prospect in IB-M&A
Mar 29, 2020 - 5:00pm

I want to make sure I stay away from comment on return offer rates and the like because that's ultimately something very serious and something that I will be totally guessing. Take in all of the information I've said with a grain of salt rock because my family has been involved in the industry for some time now and I am clearly biased.

Mar 29, 2020 - 6:47pm
RocketMonkey, what's your opinion? Comment below:

I would also be interested if anyone has takes on how Jefferies will fare in the future considering they were heavy players in the E&P scene which is undoubtedly getting hit hard.

  • Associate 1 in IB - Gen
Mar 31, 2020 - 10:51am

Recruited heavily in Houston and ended up turning down summer associate offers pre COVID demand shock. There was just a somber vibe which I can only imagine has been exacerbated in the time since. Despite finding the industry fascinating, I couldn't shake the feeling that the IB scene was in decline.

This doesn't mean that IB won't exist, but it does mean that (particularly post-mba) you are choosing to face an uphill career battle as capital market activity remains subdued, overall deal value tanks, and banks reduce or freeze headcount as you try to climb the ranks. Couple that with reduced exit opportunities and an entire city still largely built around O&G and it paints a scary picture.

In the near term, EBs are poised to generate fees with RX, but for many, that's not why they got into O&G IB. the BB picture is hard to stomach. The promised E&P consolidation has grinded to a halt--who would fund with debt, and what takeover target wants to be compensated with stock?

It's a bummer, such a cool space, the shale boom was amazing, but getting decimated by a variety of factors with no realistic end in sight.

Mar 31, 2020 - 12:39pm
chromium73, what's your opinion? Comment below:

Couldn't agree more, I love the space (in a geeky/hobbyist kind of way) but had to leave for these reasons. It's just hard to see career runway for early/ mid level professionals. The psychological toll of being in the gutter as an industry can't be understated either

  • Intern in IB - Cov
Aug 30, 2020 - 1:11pm

Do you mind sharing what industry you ultimately ended up covering and how hard it was to pivot from recruiting O&G to something entirely different? I summered in the space and feel like a lot of the sentiment in this thread is dead on and want to explore other options.

  • Associate 1 in IB - Gen
Aug 31, 2020 - 10:24am

I ended up pivoting to industrials. I don't want to sound like a grim reaper, but I also think if I had as much info as I have now about the space I would have avoided it altogether.

I truly find it intellectually fascinating, but I have a significant other and a mid term outlook to think about and didn't feel that it was prudent to saddle myself knowingly to the space.

Mar 31, 2020 - 2:59pm
LeonTree, what's your opinion? Comment below:

I generally agree that its an overreaction. However, I live in Houston and follow the industry closely and there are some questions of viability enough to have me questioning whether or not to buy a house here.

The capital markets shunned oil in gas in dramatic fashion pre-covid. Even conventional assets with strong cash flow profiles. They can say its for ESG reasons, but I think ESG is one of the many risks that make it easy for capital to say no. If people were spitting out cash, I think there would be plenty of debt and equity around.

The oilfield services market has been broken since 2008. Look at the margin profile of some of the biggest players even in $100+ oil times... They cut pricing in 08/09, never properly regained margins, and then private equity and IPOs flooded the space with equipment just prior to and during the 2016 bust. This led to a continuous price decrease that is leaving even good companies with horrific gross margins, and quite often negative EBITDA margins. Shit, I was looking at a couple public OFS companies with negative gross margins.

So lets hypothesize that the large E&Ps make it through the saudi-russia pissing match... Their drilling, completions, and overall lifting costs will eventually rise to accomodate an oilfield services industry that consolidated during the same period with creditors demanding they improve their pricing power. Breakevens as advertised are artificially low for the time being, with the losers being the services companies.

Everything that I'm reading shows crude demand increasing for another decade, and natural gas demand increasing until 2050 (give or take a decade). Lets just focus on the problem this poses for crude - if you (a) have public equity and traditional debt markets shying away from you for the risk adjusted returns profile (and the bonus of ESG statements), and (b) private equity markets worried about the overall time horizon - i.e. if oil has a 10 year run, the exit multiple after a 4-6 year hold will be materially lower because the strategic on the other end is running a dcf with pricing assumptions considering the demand decline. You're just left with mezzanine debt type investors in the space...

Apologies for the rambling thoughts... quarantine got me fucked up.

Apr 9, 2020 - 7:08pm
Premia, what's your opinion? Comment below:

Shale is and was a Ponzi scheme. I could elaborate but I would rather use the same amount of effort as your post.

Array
Apr 7, 2020 - 11:22am
OGbanking, what's your opinion? Comment below:

This commodity environment and energy transition really makes it tough for young professionals thinking about their long-term career outlook in O&G. I'm 3 years into my career with all traditional O&G exp. Every article I've read since joining the workforce has been bearish af on the industry outlook. I don't want to move away from Houston, but it's lifeblood is O&G.

Bobby Tutor recently touched on the topic discussing how Houston needs to adapt with the energy transition. I saw Credit Suisse is deploying an ESG arm through their O&G arm yesterday and know TPH has a energy tech arm. I know some PE funds in HTX have created energy transition teams. Maybe we will continue to see change, but the only major renewable/power player I'm aware headquartered in Houston is EDP Renewables. On the banking front, P&U groups are out of NY and healthcare is covered in Cali and NY to my knowledge. What does Houston look like 10 years from now? Yeah peak oil & Gas demand are still down the road, but come on..the writing is on the wall. Even the major's alternative energy groups are located outside of their Houston offices. I really hope Houston can adapt. I know a lot of young people in the O&G world are worried about longevity. Love to hear thoughts.

Apr 7, 2020 - 11:43am
BallsOnChinBoy, what's your opinion? Comment below:

Renewable energy makes up around 4% of US energy consumption. Oil 1/3rd, Gas 1/3rd, coal/nuclear/bio-fuel/other the rest. If you think oil is doomed, and you don't want nuclear, and we all know coal is doomed, then where are we getting the energy??

Houston is fine, O&G is will recover, and this forum is overreacting.

Apr 10, 2020 - 8:40am
chromium73, what's your opinion? Comment below:

I don't think people are arguing that oil and gas is going away, however the US shale industry faces an existential threat as a decade long incinerator of capital and investors will bail on it. I work in infrastructure/energy PE and can tell you for a fact this is happening. The supply wedge will be met by majors and international operators, a fact pattern that is unmistakably bearish for investment banking and PE in Houston. I'm not sure what it will do to the city overall, probably not much outside of the little bubble this forum occupies

  • Trader in Other
Apr 7, 2020 - 8:39pm

Honestly, what fee generating work are BB's doing right now and in the near future? Capital markets are essentially shut to oil and gas, even pre-COVID and M&A is relatively stagnant.

  • Analyst 1 in IB - Cov
Apr 9, 2020 - 7:27pm

(All in the immediate term because who knows what long-term outlook is)

Depends on the bank. Balance sheet focused lenders and cap markets banks are gonna take it on the chin. Other BBs with solid relationships will make it through. Boutiques are hands down the best positioned. As an analyst at a Houston BB, I'm personally exploring the option of moving to an EB platform.

Apr 12, 2020 - 2:03pm
Banker23894, what's your opinion? Comment below:

Thoughts on TPH?

Array
  • Intern in PE - LBOs
Apr 14, 2020 - 3:01am

Any thoughts on Calgary guys? They've been getting thumped harder due to lack of pipelines but curious as to what you guys thinks and what the outlook could look like for Canadian O&G sector?

Apr 14, 2020 - 11:27am
Xhamster02, what's your opinion? Comment below:

It's bad in Calgary. Western Canadian Select is going for less than $10/bbl. Between pipeline bottlenecks, LNG projects being cancelled, and a leftist government that is reluctant to incentive the oil business to grow, I would avoid. Even Encana, a legacy producer, left Canada and relocated its HQ to Denver.

https://www.bloomberg.com/news/articles/2020-03-26/canadian-crude-is-so-cheap-it-costs-more-to-ship-it-than-buy-it

https://globalnews.ca/news/6234607/energy-exodus-oil-and-gas-alberta/

  • Intern in IB - Cov
Aug 31, 2020 - 2:44pm

Yup, I think I really fucked up by interviewing at 3 BBs in Houston when I probably should have put another location as my top choice. (Though the fact that I made it to two superdays and some of my interviewers seemed really receptive must means I didn't fuck up the interview part specifically too bad.)

Also, some folks in Houston really can't fathom the idea that someone from the East / West coasts would be intellectually interested in oil and gas and it comes across as off puttingly close minded. 

Apr 26, 2021 - 4:31pm
TheEmperor, what's your opinion? Comment below:

Curious to hear people's thoughts on joining / being in Energy or Natural Resources groups outside of Houston for those of us who are undergrads, junior bankers, or MBA students considering junior-level roles. I know most BBs / EBs have teams in NYC. Presumably NYC gets more of the non-O&G dealflow in the sector as well as exposure to the more reliable midstream and downstream verticals rather than upstream. Anecdotally I've heard a ton of dealflow is going through these offices in the last year related to the energy transition and demand from SPACs for EV/renewable assets.

Apr 28, 2021 - 3:11pm
Jeff Skilling, what's your opinion? Comment below:

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