Personal Experience with Houston Energy IBD - Thoughts on Industry Outlook? (Long Post)
tl;dr Lateraled to EB (M&A/RX) from T1 BB. Do people think Energy will hit a rough patch with the impending recession? If so, are BB's destined to fall behind like DB as these Elite Boutiques grow out both their MM and RX practices? Has anyone felt that talent in TX has declined – no longer feeling obligated to recruit from TX? Feel free to discuss anything Energy related, and I’ll also answer any questions!
With all these kids talking about 2020 recruiting, I wanted to turn to the experienced bankers to see your thoughts on the Energy IBD industry. For some background, I graduated from an honors business program at a target Texas university and ended up at a top Energy BB (GS/MS/Barcap). I've been here 5 years (A2A), and I enjoy the work I do. But, I recently made the personal decision to lateral to a prominent EB in the space.
Throughout the years, I’ve been fortunate enough to get staffed on some of the largest O&G mergers, but our firm has also come up short. Even with Occidental, there has been less M&A from when I started and A&D seems to be a large percentage of my work. The space is constantly changing and adapting, and one of the key trends I’ve noticed is the growth of EB’s. While brand name BB’s will always be key players in the space, firms like Evercore have entered and dominated in the last couple of years with both an M&A and RX platform. To categorize firms like TPH, Jefferies, and Evercore as boutiques in Houston is quite bizarre to me. Many of these banks do business in the exponentially growing MM, and despite popular belief, we’ve struggled to win in the space even with our brand name. On the other end of the stick, BB’s like Deutsche closed their O&G arm (among other problems), and other BB’s have struggled to compete. "Struggled" could be an overstatement, but it's not like it was a few years ago given the cyclical nature of O&G.
Outside of personal connections, I chose to lateral to an EB due to its prominent RX arm. When you talk to MD’s in Houston, it’s common knowledge that O&G hasn’t performed that well. There’s an impending recession, and even if it’s never going to be as bad as ’08, there’s likely to be hits to firms across the streams. Many E&P companies are struggling with debt on the BS, and even OFS has taken large hits. This led me to the conclusion that banks with a strong RX arm will be best positioned over the next couple of years. I admit that I never quite understood the "Elite' nature of many of these RX firms including PJT, Moelis, Lazard, HLHZ, Guggenheim, etc as Houston is distanced from NY, but everyone's heard of PJT, Moelis, and HLHZ in Restructuring. Yet, there are still questions like how can PJT run its O&G practice in NY? – it’s almost laughable. On the other hand, PJT’s reputation in NY is great, and they’ve worked on many of the recent Energy restructuring mandates. Moelis is another firm that has leveraged its RX arm and overseas connections. HLHZ has been moving some of its NY RX bankers down to Houston, and Lazard has also beefed up both its MM and standard M&A/RX practice. Even Guggenheim has a Houston office now, so it looks to me as these firms are preparing for something. These are my observations, but I want to hear any thoughts and opinions. I honestly believe it's easier to answer a "why our firm" interview question for these EB's than BB's.
This is a discussion at the end of the day so feel free to post your thoughts or any questions!
Side Note: I’ve done some introductory calls with prospective 2020 summer analysts at the standard TX targets, and this is something I’ve noticed. Many students from my alma mater claim that they’ve received exposure to Energy through investment teams and extracurricular activities, but when I probe, many can’t even list the verticals. We’ve always felt obligated to recruit from schools such as SMU, UT, Rice, and TCU because it’s convenient, but there’s a very noticeable gap in finance technicals and even industry knowledge from calls I've done in the past week or so. I think many Houston firms have always pushed away students from Harvard/Wharton/Columbia/USC/etc. in fear of them leaving to NY or Exiting, but I’ve been impressed year over year with many of these students. I've always been one to push for a student from out-of-state that's a stellar candidate, even if their "Why Houston" question isn't quite convincing. Is it just class of 2021 that seems under-prepared, or has this always been the case? Does anyone else that’s interviewed students from both TX and NE see this gap? Have you guys recruited more from standard targets or still primarily Texas?
Not in IB, but I'd be willing to bet on an uptick in M&A in dry nat gas focused companies. The investors have dumped too much cash into these companies that were just told to grow and can't seem be cash flow positive given the new record production levels that are depressing the price curve. How can they be cash flow positive in this $2.5 cal strip environment when they weren't in the $3+ cal environment? These dry gas companies are either going to be forced to look at M&A or bankruptcy to deal with the insane debt levels.
I joined a Houston BB in 2016 from an northeast MBA. That year, there were 8 Houston IBDers my my class. Last year there was one.
The reasons?
1) Oil and gas has been the worst performing sector since that time, and possibly since the financial crisis (well maybe coal and paper/pulp is worse). It’s almost comical to see these stock price performances in E&P and OFS.
2) Peak oil demand and climate change seems to dissuade people from hitching their wagon to the space.
3) BBs are starting to cut headcount in Houston. Cap markets activity is down 90% YoY.
Take this as you will, not here to throw shade (I still cover the space) just provide some facts.
This conversation is turning more and more towards recruiting, which isn't bad, but I'd love to hear anyone's comments on the industry outlook (M&A, A&D, RX) and how they believe certain firms are performing! I think this would be great information for anyone interested in the industry as well to show that it's really more than just wells and charts.
The lack of cash flow in the space (one of the worst sectors in the last 20 years at returning cash) is troubling. In E&P there really aren't any exits of MM operators anymore who were using $100m equity + some debt to prove out some reserves. In OFS, the multiples are horrendous and the big players (SLB/BHGE/HAL) are all essentially on an M&A moratorium (they are still looking at creative structures to get technology, but no true acquisitions).
Other than the megadeal M&A in the space, the short term impact is less fees to go around as hold periods become longer. The long term impact will be a continued struggle to fundraise in the private markets.
I'm still bullish on hydrocarbons, but becoming slightly bearish on the risk adjusted returns in the private markets. If I was advising someone who had opportunities in other sectors, I probably would tell them to avoid O&G in the near term. That said, some people just want to be here in Houston and O&G are the opportunities.
Bump, this would be awesome to see, especially as Houston has become more A&D focused recently. Seems like some shops have really excelled within A&D historically so I'm interested to see if this has any impact on your rankings.
I knew someone was going to ask eventually, and I hate these tables. I chose to do it in a way that I think will be most helpful to anyone out there -- your standard rankings, but also commentary on where I think the future is. ** I'm going to preface this by saying there is never a "right" tier list. **It depends a lot on preference, verticals, and culture.
Current Standings: Tier 1 BB - Barclays, GS, Citi, CS
From when I first joined, these four companies have led the space in terms of deal flow and exits, and I don't think THAT much has changed. CS has definitely fallen a bit due to having MD's poached, but they've historically placed really well in terms of exits - I have couple of friends that managed to exit to traditional megafunds as opposed to sticking with Energy buy side. I think it's common knowledge that Barclays has lights out placements, and their culture is one of the best. Despite having immense deal flow, the teams there will always go home earlier than most other analysts. GS will always have business, and, I still categorize them as T1 due to brand name. Citi is a great place in terms of reputation, but each and every one of my friends chose to exit as opposed to A2A - they were burnt out for sure. I could write all the commentary in the world on these firms, but I think the most important question is what work are you going to be doing? You'll get a great OFS experience at GS, but you can potentially learn a lot more about E&P at other BB's and EB's Many people say that O&G is all about E&P, and if that's truly the case, I think there's an argument to be made that GS shouldn't even be T1. The only BB above that's solidified itself as T1 is Barclays.
Tier 1 EB: Evercore, Jefferies, possibly TPH
Everyone knows about Evercore's E&P practice and Jefferies' A&D practice. Realistically speaking, you're going to get absolutely cranked at both shops, but it's worth it if you want a near-guaranteed exit to a top shop. From a post-undergrad POV, the comp at any of these EB's is quite nice - I wish I got paid this much at a BB :( Nonetheless, I feel like the boutiques here have established themselves as top of the list so there's not much additional commentary. TPH has always been a good shop in my mind, but friends there have told me that the deal flow is drying up. Great culture from conversations, but I don't know too much about them outside of intelligent senior members. Btw, Evercore and Jefferies are hardly "boutiques" in the space.
Tier 2 BB - JPM and MS
JPM, similar to GS, has a great brand name, and that always plays a big role throughout the industries. They're a bit under the radar in terms of the work they do, but they have a solid midstream practice. They're not as reputable as Citi in this space, but they're doing better than many other BB's. MS had a great year, and I categorize them with JPM for a good midstream practice. That being said, I think these two firms exist mainly due to brand name, and they're not doing any amazing E&P deals - they're going to be as close to your standard NY M&A as you can get, possibly without the late late nights.
Tier 2 EB - Simmons, Moelis, LAZ
This is probably the place where everyone gets heated. As much as many people dislike Lazard Houston and don't think they deserve to even be Tier 2, I would make the argument that the individuals there are quite impressive. Lazard still has managed some decent exits despite having less deal flow over the years. The downside is Lazard anywhere in the world is a sweat shop, which I don't understand because they're not getting the work that Evercore is. The other point of contention is Moelis being Tier 2, which I believe they deserve for both their A&D work and their restructuring practice. They're a big reason why Lazard's deal flow has dried up on the RX side, and they've also managed to beef up their practice through poaching and connections. Simmons has just been doing their work behind the scenes, and they don't get much recognition these days. Still a solid shop, but they don't have the brand name that many of these other firms have.
Tier 3 BB- RBC, BAML
RBC has been trying to grow out its A&D practice for quite some time, but they haven't gotten the outcome they wanted. BAML has sat backseat on some large deals, but you've got to give them credit for not becoming wiped out in an industry that's been filled with the same BB's.
I don't see the point of ranking the rest of the firms T3 and beyond because it's going to be highly disagreed upon, but someone's still going to ask...
Tier 3 EB - Just HL I think I wanted to categorize HL, PJT, and any other boutiques all together in one category for the rest of them, but I think what HL has done in the space at least puts them above the other boutiques. I don't think Lazard has fallen to the point HL has grown so I just put them here solo. They've hired some pretty impressive MD's that have extensive A&D experience, and they've done some good stuff in the MM (OFS). I also heard that instead of doing a lot of their O&G/Energy Restructuring work out of NY, they actually relocated some of the NY RX bankers to Houston. If that's the case, then I would say it's not right to categorize them as an Energy group as opposed to just another one of HL's RX regional offices that have been pretty solid.
Tier 4 BB - UBS, WF, etc.... I don't think there's much of an argument to be made for these firms at this point. I honestly don't know what many of them do in terms of deal flow and verticals, but I do know many have lateraled to better BB's. Most of these firms will just get what they can get.
Tier 4 EB - PJT, Guggenheim, Greenhill I don't care if PJT has its brand name and legacy from BX - there's no way any firm can run an O&G group out of NY. Guggenheim and Greenhill are extremely new, so they haven't done much of anything besides hire junior bankers. I haven't heard much of them, but PJT has always been a bit iffy for me.
Tier 5 BB - RIP DB
**The Future ** This was the part of the reason I wanted to hold this discussion - for rising juniors like yourself, I think the better question is where the industry will be when you graduate. I think from my comments above, many lurkers can see which firms I think are going to do well. At the top, Evercore, Barclays, and Jefferies will most likely be there a couple years from now. They're constantly recruiting top talent, poaching senior members, and they have great deal flow. Furthermore, Evercore is quite the top dog since it also has a restructuring arm, which may be its ticket to the sky in the near future. CS and Citi have hit a slump in terms of deal flow from what I've heard, especially Citi since midstream has too many players now. It doesn't help that we may be approaching a downturn. I believe TPH will rebound since I've been blown away by how knowledgeable the top of the group is. From an undergrad perspective, I've always loved how TPH takes the time to do a summer workshop, which really gives candidates a head start no matter where they land.
I think the real growers are going to be Moelis and HL. Moelis has shown that it can bring in A&D work, and I don't think it's just because of their restructuring practice. For such a lean team, it's quite outstanding what they've been able to do. HL is a different beast, having their bread and butter in the financial restructuring group. Rather than just running a lot of its energy restructuring out of New York, they've chosen to actually bring down members from their "elite" group. Unlike Lazard, HL has seemingly integrated both its RX and Energy practice as opposed to having an energy coverage group just helping out the real RX team. Not to mention, a lot of work is in the MM, where HL has been for quite some time now. In the end, I'm part of the club that believes the top dogs will be E&P focused with good A&D practices and even solid RX practices. If any of these firms can maintain and build good E&P practices, then they'll manage into any sort of downturn.
I've gotten some DMs about PJT, but to be frank, I feel like most of them are individuals who want to just be associated with PJT's brand name. Sure, you're going to be in NY doing M&A with the rest of the advisory group, but how can you justify to anyone that their O&G practice is in Manhattan? There have been rumors about a Houston office for quite some time, but I'll believe it when I see it.
Please feel free to leave comments - I prefer you just post your thoughts or add commentary so I can edit the list rather than just handing me MS for something as dumb as Lazard being T2 instead of T3.
So Evercore #1?
There's not a solidified #1, but Evercore is definitely among one of the best firms you could select. Any of the groups I mentioned above are great for long-term opportunities and exits, each have their own pros and cons. If you prefer to be with a larger analyst class or want to get the "BB Experience", Barclays, CS, and GS are all great options. If you want to be on a leaner deal team, then Evercore, Jefferies, and TPH are all good choices.
That being said, EB's will usually be harder to break into, both from a group culture and technical POV.
Was messing around. Kind of obvious you work at Evercore
Agree 100%. Clearly works in EVR E&P / upstream group.
Putting evercore’s upstream practice on par with Jefferies or TPH is laughable.
Well, the first thing to note is I haven't even started at the EB, as mentioned in my post; I will be joining as a lateral soon after a leave of absence. Second, I don't believe Evercore has a dedicated E&P group as individuals work across both upstream and midstream. I concur that both Jefferies and TPH have great upstream groups, and I never once mentioned that one firm was better than another. I think all 3 firms are great, especially TPH when it comes to the learning experience. All 3 have good exits historically!
Let us know if you’ll not be starting at Evercore once garden leave is over