The real reason why Houston O&G IB is sweaty
Guys and gals, I think it's a lot simpler than the usual answers about "culture" and so forth
We're just competing now harder and harder for a smaller and smaller pie. The number of tabs on our comp file keeps going down since I started in my internship years ago (ignore title). If the name of the game is consolidation...what's the end state? The thing with energy is everyone loves to get political with it but I think the reality is a lot simpler and it's just that we're not going to get significant growth capital coming into the space until we get WTI at around $90, $80 at minimum for a prolonged period of time and not just a little spike here and there. And, that's not a scenario really anyone wants because you'll just get more EV switching. Pure play nat gas probably more resilient with the power demand and LNG but still, at what point do we get significant growth capital? HH $5? HH $6? We're not there.
I've seen the usual sponsor books that groups like healthcare or industrials do. They're not putting the same level of detail that we are. It's because in energy we're all pitching the same deals now so trying to differentiate when there isn't a lot of differentiation, just slightly different flavors of bigger gas company X buys slightly smaller gas company Y, slightly different flavors of synergies from G&A, GP&T, frac water and proppant, etc. Because of this, we're forced to get extra with it since the number of public players and even private players keeps shrinking each year.
As a former O&G banker, this is spot-on
can i pm you?
golden age of energy and golden age of banking coincided. back in the 80s energy was the hottest industry and 6 out of the top 10 largest companies were energy-related. now it's only one. times have changed and tech is the new big thing. we'll see if energy dealflow picks up again with the transition happening but still lots of question marks
This is next level regarded.
+1 SB. Agree with the above but beyond this, there are additional reasons that oil & gas is so sweaty: an endless amount of acquisition and divestment ideas.
You can always pitch a dozen offset acquisitions to any player plus you can pitch other basins and out of the box ideas. On top of that, everyone has some junk that they could divest.
Deal activity as far as deals closed can speed up or slow down but you can essentially keep pitching hard in any price environment.
In comparison to perhaps the polar opposite, how many reasonable acquistion targets can you pitch to United Airlines as an example?
Granted, but also if you're covering transport & logistics, I assume you have a broader and more fragmented market beyond just air travel? I'm not sure how many ways there are to say slightly bigger upstream company A should buy slightly smaller upstream company B, or likewise for midstream. Yes LNG is exciting but Cheniere is a $50 billion market cap. Impressive, but NVIDIA is...$4 trillion.
I don't say this as a hater. I say this as someone who genuinely likes energy but thinks I might need to pivot.
Believe he’s referring to A&D. As there’s more opportunity in O&G since you can pitch to company X to go buy acreage in the Utica or Haynesville + a gas company might acquire another and then divest acreage they don’t want and so on
Agree with @IBWriterMachine but with your statement as well. If your sector is very broad like industrials, you might not have a lot of potential M&A targets in any particular subsector but you have so many subsectors that you can stay busy all the time.
O&G is trench warfare
The reserves need replenishing
Zzz
Also all the companies do the same thing, which forces senior bankers to get really nitty on what they want to show, then a ton of data isn’t mandated in 10Ks and Qs so it’s like pulling teeth to make a decent comps page.
Agree. The banking side of things was really sized for a substantially larger fee pool primarily driven by levfin and ECM activity. M&A fees have always been smaller compared to other industries because of how much banks got paid on funding. Post shale burst (~2014-2016 downturn), cap markets fees have largely shriveled up (RIP MLP follow ons, IPOs, fewer HY borrowers, living within FCF etc etc) but very few banks have left the space.
Beyond the number of competitors however, I think a major differentiating factor is the ability of banks to do technical analysis independently and generate comprehensive asset and financial summaries. Almost no other industry group regularly develops life of company forecasts just to throw in a pitch. It's bonkers. Then layer in the shear quantum of metrics that can be benchmarked, which require handscrubbing rather than a factset/SNL pull. It's a tough life
“Very few banks have left the space” - technically true on a gross level - but what other industry this decade have you seen banks completely shut down coverage teams?
BMO, DB, and UBS were formally (UBS had legit like 1-2 MD doing nothing in Houston for multiple years from what I heard) shut down in Houston.
Scotia and KeyBanc are basically dead as well.
TD historically struggled in Houston to ever build out a competitive team.
Baird technically has an oil and gas team but who knows what they do.
Stifel does the most irrelevant low fee garbage deals - and somehow keeps the lights on.
Macquarie has been sketchy with layoffs for a while but don’t know the situation there.
There’s absolutely more banks that will formally exit the space.
Scotia has OK deal flow
I hear you but it also feels like sentiment has shifted away from ESG/transition/renewables and we're hard pivoting back to traditional energy. I would bet on a new entrant before a departure.
AI and data centers -- so hot right now -- AI and data centers
Either way, let's give credit to all you referenced above, so then merely left with... GS, MS, JPM, C, BAML, BAR, RBC, Jefferies, EVR, MOE, LAZ, GUG (?), TPH, WF, Piper, TD, Intrepid, PJT, Mizuho, RayJay, HL, Truist (?).... just the names that came to mind and definitely not comprehensive (and intentionally listed in random order so don't @ me preftease trollz)
My broader point was that despite what would appear to be relatively high barriers to entry (balance sheet, product offerings, technical team, broad sector experience whatever) there are still way too many banks relative to the fee pool. No free lunches in the space quite yet and really it's more of a dog fight between banks for each assignment. Compared to other industry groups I have to think most of the energy groups don't earn their cost of capital
What do you guys think about Riley Exploration Permian? Trades at like 5x P/E and pays a like 7-8% dividend yield. I’ve always wanted to invest more but unsure if there’s heightened risk with it being smaller. It is at like half the P/E of a larger independent. Curious if you O&G specific guys know. I’m more of a tech banker but have always been interested in O&G
P/E lol
Just so you know, he said lol because PE isn't a thing in energy due to how capex intensive it is and that not hitting GAAP earnings. Look at EV/EBITDA
Ya, as he said P/E is irrelevant. EV/EBITDA better but really it’s P/CF or FCF yield and FCF/EV. The div yield is right way to think of it and I haven’t ever really looked at REPX but generally those small caps are screwed - bad liquidity, mediocre assets, and no real differentiated story (returns some but not a lot of cash to s/h, asset quality is blah, etc).
So, what would you suggest people coming into the space do? As reserves dry up and non-economic reserves become viable and available for extraction due to rising prices (demand-driven expansion/capex), do we look internationally for deal flow/growth capital?
I believe in the energy transition story but I think it's too little and too slow to really take a chunk out of E&P in mere years. The shifts you're talking about will probably take decades...is it worth holding on to the lifeboat and trying to find an island or jumping ship now?
I think if you have a passion for it you're probably fine. There are "boring" industries like consumer & retail where people still have great careers. Just energy is hyper cyclical. 2010s it was super hot and that just isn't the case now, although maybe trending up with LNG and data center demand.
lol love the byline dude, legit think we can (and will) win it all this year
fwiw, as someone who is a little ahead of you, there’s still room for hardworking people who enjoy the space. most analysts today couldn’t care less about E&P and don’t make much of an effort to understand the space. Private deal making is hard right now but there’s still a lot of capital left. Until someone really cracks the code on infills/better recovery, the folks with creative ideas and dogged effort will be the successful ones and there’s always a need for more of them.
Energy transition will continue to evolve and if you’re ok with being a power guy then it’s a great place to build a career. There’s going to be headwinds until we get a democratic admin but manageable either way. I’ll Say this though, I’ve heard some horror stories about recent transition fundraises. Returns have not been particularly great and a lot of the stuff that worked in previous funds (esp battery developers) are unlikely to work the same way. Now everyone and their dog has a datacenter developer. Some will be successful and a lot won’t. TBH it reminds me of E&P circa like 2015, there’s some obvious structural differences but similar vibes.
Worked at a super major in corp dev briefly, can confirm the banking side of things is stupid sweaty, and I probably spent half of my work week on calls with every BB bank under the sun, talking about stuff that never materialized. The super majors are still good companies to work for all things considered, but like media, it's pretty concentrated now, and similar to how Disney is sunsetting a lot of legacy businesses like cable, O&G is doing the same with all its divestures and acquisitions - it's also probably the most technical field when it comes to financial modeling and it's more annoying than fun.
Who did the modeling for those transactions. You or the bank?
Split pretty much evenly
Yeah that's a thing for me also, we're pitching company A to roll up slightly smaller company B, but I've got to believe their corp dev teams thought of this already. They know the acreage better than we do. They know how to run an O&G company better than we do and what synergies actually are and not just our stock copy/paste bullet points.
Most large cap upstream players have bulky CD teams and are already aware of the deals they are interested in pursuing for the right price. Pitching to them is mostly useless but banks still do it to keep the conversation flowing. Mostly banks are useful if company needs acquisition financing of some sort. For sell side mandates, companies prefer boutiques like Jefferies due to their subject matter expertise.
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