What's going on with Energy A&D?
I know that the golden period for Energy A&D was in the previous decade, but has the activity come to a complete standstill?
I would assume things are picking back up through means of distressed sales, companies looking for scale, and opportunistic buyers. I would assume (with Pfizer's news today) that the end is in sight and demand should pick back up too - WTI was trading at ~$40 bbl last I checked.
But then again, I am just an incoming intern. Thus, was interested in seeing and hearing from people who work in energy IB. So, what are y'all's thoughts on the A&D scene in Energy?
Bump
There will be buying and selling regardless if prices are high or low; the key is a stable price environment. No one wants to buy a target at $X/share and commodity prices tomorrow your purchase is worth 30% less or if the prices skyrocket, the seller is not going to be happy if they're worth higher than what they sold at. A&D groups specifically have been pared back across all groups but these are technical people (geologists, etc.) not coverage bankers so you have nothing to worry about. M&A has been healthy in this depressed price environment if you've been paying attention to the news.
Agreed. How has that affected banks such as Jefferies and TPH?
M&A definitely seems to be back with the Chevron/Noble, Devon/WPX, Poncho/ConocoPhillips deals amongst others.
Also, if you don't mind me asking, would you be able to post the YTD league table for Energy IB?
While yes, the eventual end of the pandemic and a recovery in demand is a net positive for O&G operators - I don't think this will translate to A&D markets. A&D was hurting way before the pandemic. I don't see A&D markets ever getting back to pre-2016 levels - juiced engineering (looking at you, JeffCo) and seemingly unlimited supply of capital made it a perfect storm. Today, everyone is still hurting from overpaying for crap assets, capital is constrained with ESG making it worse and crap returns as the final nail in the coffin. Focus is on living within cash flow as opposed to growing production, way less credit is being given to production growth - in both equity markets and energy credit (e.g. RBLs, etc.) - making A&D a much lower priority broadly.
Name of the game today in Corporate M&A is G&A consolidation and achieving scale, mostly out of necessity. Think we'll see pretty active consolidation over the next couple years which will yield a very different E&P landscape afterwards.
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Bulge brackets have dominated the latest M&A wave in O&G. Boutiques nowhere to be found for the most part (TPH with the most market share on relative basis).
Top Banks in 2020 for O&G M&A:
JP Morgan, Credit Suisse, Goldman Sachs, Morgan Stanley. Surprisingly, Citi and Barclays which have had strong O&G practices aren't well represented (up to now).
10/10 response, thanks for taking the time. Agree with basically all of this.
That's very helpful, thanks for the insights. Yeah, it seems a little surprised me to me as well in that Citi and Barclays aren't there in the action. Also surprising that the boutiques (TPH/JEF/EVR) aren't there in the mix as well.
I was wondering, is it because a lot of these banks made a lot of money (for example, JefCo, like you mentioned) when the levered up the assets and sold them at unbelievable prices, and now that the tables have flipped, a lot of the companies have been left with a bad taste of these banks and thus don't wanna work with them? Cuz its not like the M&A is being financed with debt so the corporations don't really have a need to go to a balance-sheet bank as such. from a pure advisory point of view I would have imagined that these boutiques would have stood out.
Good questions. No, I don't think it has anything to do with a shortcoming on behalf of the boutiques.
I think two points to consider, but ultimately it comes down to relationship management the way I see it. Having a balance sheet is a huge asset (minimal pun intended), especially in such a capital intensive industry. Even if not a direct component of the transaction, these issuers are going to need to tap the markets to refinance the debt of their purchases (assuming the debt doesn't equitize or roll). And in a market where so many loans are going bad and banks are cutting exposure to energy credits broadly, its always good to throw your bank group a bone and be on their good side. The second consideration is that these aren't particularly inspired transactions - everyone has been pitching these names. It doesn't take some unique insight that only a boutique can provide, and in the absence of meaningful differentiation or an extra strong relationship, these operators are going to keep their bank group happy.
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