1a. When is O&G/energy deal flow strongest in the US? My rationale is that during times of high oil prices, capital markets activity for the energy sector will be strong as drillers ramp up production and invest heavily in PP&E. During times of lower oil prices, I see M&A(potentially distressed) to be stronger because non-profitable drillers will be looking to convert to cash and drillers that remain profitable will be able to acquire these at discount prices. Is my line of thinking here correct, and what are the other/opposing schools of thought? In terms of total advisory revenue for the energy sector, are lower or higher oil prices favourable?
1b. 1a primarily inquires about upstream cos. What are the economics like for mid and downstream?
- This question has been bugging me for quite some time. Why is the US allowed to ramp up production while OPEC is pushing for production cuts on their end? I'm unfamiliar with the relationship between the US and OPEC, which is why I likely see this as a one-sided negotiation with the US strongarming OPEC nations.
All else equal obviously higher prices are better for profits, investment, and capital markets activity
1a. Hard to say. O&G is notorious for M&A. I would say higher prices, more activity.
1b. Mid and downstream are relatively stable right now.
Saudi gov't can tell Aramco to stop drilling. If the US gov't told shell or BP to stop drilling they would get laughed at.
Thanks for the insight. I guess what my question was trying to address has to do with the prisoner's dilemma involved. Why is the OPEC willing to make concessions when its obvious that the US is going to take advantage of them pulling back? Is it because the economics of drilling for them is worse at current oil prices rather than the additional revenue they'll get at their old production rate?
OPEC is fucked. Venezuela is going into rebellion and Saudis can't drive as many lambos everywhere. Shale drillers are still crippled but it is getting better.
Everyone in the industry wants prices to go back up -- no one benefits from $50 oil... everyone is more prosperous at 75/80+.
US production is currently at the highest level since Aug2015 because the cost of production is still below current prices (typically $40-$45/barrel for most shale plays). Also, most O&G producers locked in hedges when crude prices were higher ($50-$55/barrel), so they aren't as sensitive to the current market prices in the short term. Only about 15-20% of US production is hedged for 2018 as producers are waiting for prices to go higher. This could be an issue later in the year and into next year if prices don't recover. That could lead to more bankruptcies/M&A activity as companies continue to struggle.
Saudi Arabia's entire economy/GDP is tied to the price of oil. Even though Saudi Arabia's cost of production is between $8-$12/barrel, they have economic incentives in place for their citizens that are tied to oil prices being much higher.
US production is roughly 10mm barrels/day. OPEC production is 30mm/day. The US is not strong arming OPEC. The increase in US production has caused OPEC to re-evaluate things but at the end of the day OPEC always has and always will be the one calling the shots.
1a. It's overall stronger when oil prices are higher. Even the climb from $30 to $50 a bbl has sent the markets into overdrive. However, even when markets are weak, companies need financing to stay afloat, restructuring will open up, and the strong will buy up the weak for bargain basement prices.
1b. Mid/Down stream are much more stable. Overall price is less important than volume. OFS on the other hand swings even harder than E&P.
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