O&G investing?

koalalove's picture
Rank: Orangutan | 337

I am currently a corporate strategy intern at a supermajor. My boss has suggested that I complete a research project by the end of the summer on a topic of interest. He has really given me free reign, just asking me to run the idea by him before starting. Although I am somewhat knowledgeable on current events and their geopolitical consequences, I would like to do more research on the finance/investment side of O&G markets, since my ultimate goal is to go into banking/private equity, perhaps in the energy space.

What topic(s) would be most beneficial for me to study, and most impressive to interviewers at banks in the future? Any suggestions?

Comments (93)

May 24, 2017

bump

May 25, 2017

Hmm, there's a lot out there but most involve service companies and private equity.

It may be worthwhile to look into the shortage of midstream assets in Texas. Could be a problem by year end with production as high as it is. Definitely would be good to talk about in a banking interview, I may or may not have been asked some questions about midstream infrastructure when I was recruiting.

Not really applicable to supermajors but you could also look into all the SPACs that have come out in the last year. Another not applicable but interesting project could be trying to digest Aramco's strategy for the future.

May 25, 2017

@koalalove there are a lot of areas you could look into...here are a few I'm interested in:

1.) Changing business model within OFS (i.e. Move towards a total well solution where you do everything from geo-mapping to extraction of hydrocarbons) and its impact on M&A of technology companies and startups.

2.) Technological changes within the industry (i.e. Move away from 10-15 guys on the rig to a computer-aided process for drilling managed at a data hub). Gives rise to venture capital funds for companies like Schlumberger.

3.) Look at current pipeline network and tie into major shale plays and try and predict new routes. Harder to do but would really make you stand out.

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Best Response
May 25, 2017

Here are a few that should be very relevant to your boss: which path should a large O&G company take to maximize long-term shareholder value through the cycle:

  1. Spend within cash flow and accept "lower for longer" or outspend (with debt financing) since we may be near a bottom of this commodity cycle?
  2. Sell non-core assets now or hold onto them as they may become profitable again in the future?
  3. Deploy capital in the U.S. shale basins that are very hot at the moment, or avoid the potential bubble and take a contrarian approach by investing in underappreciated international assets?
  4. Spend excess cash on dividend / return of capital to shareholder, production growth, or reserves growth? What is the optimal mix?
  5. For production / reserves growth, better to do it through the drill-bit or through M&A?
  6. Retrench into upstream or diversify into midstream/infra/storage or even downstream?
  7. Increase oil/liquids content, pivot to natural gas, or take a diversified approach with some renewable investing?

Answering all of these questions is an ambitious task, but if you understand all the parameters of an oil and gas company model (exploration, M&A, production, cash flows, down to a 3-statement NAV) you should be able to run different scenarios and tweak the choices above to see the results under different price and cost assumptions. For example, your views on oil prices, service cost inflation, and long-term interest rates / dividend appetite would all impact the answers to the above questions. The answers would also likely change depending on the size and profile of the company / team / shareholder base. Understanding how all of this fits together would probably be good prep for future PE interviews in the space.

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May 30, 2017

These are all really interesting questions. Like I mentioned, since I'm not very familiar with the finance angle (M&A, NAV), do you think I could potentially use this as a networking opportunity and cold email alum in the energy ib/pe space? Do you think they would be willing to talk more about it, or would it come across as bothersome?

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May 30, 2017

It's definitely worth a try... you have nothing to lose by reaching out to people in a polite and concise way.

May 31, 2017

in terms of the research itself, where should I start? i suppose looking at what has and hasn't worked for the supermajors in the past... what specifically should i look for in the financial statements?

May 31, 2017

Are you in upstream, midstream or downstream?

May 31, 2017

well the company is involved in all activities of the supply chain, but I work at the representative office so I don't necessarily focus on one area of production

Jun 1, 2017

Focus on which process interests you the most. If you're stuck on where to start, you could look at some research on seeking alpha from people that have written about the energy space. They've got some good analysis about current affairs. All the banks out here in Houston love guys that already know how the value chain works, they can teach you all the accounting. Or any of the big boys like oxy, chevron, shell, Exxon like to recruit if you already have experience

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Jun 1, 2017

OilPro
Energy Manager Today
Greenbiz
oilandgasinvestor
pennenergy
The IET

I think the space is pretty attractive at this point with hedgies focusing on distressed debt:

"Many distressed debt strategies, which topped both lists, got a boost from the rally
in commodities. On average these funds gained 15.3 percent, and were among last
year's top performers along with energy-focused equity strategies, which rose 18.1
percent on average, according to HFR. Overall, event-driven strategies performed
well in 2016."

It seems like energy IPOs are being filed more often now as opposed to last year, just a thought.

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Jun 1, 2017

I actually invested in FRAK (VanEck energy etf), when it was hovering around 18$. That was really low, for the time, and it's fallen down to 16$. I'm definitely going to hold and sell, once the price of oil goes back up.

I'm trying to decide where I want to invest in tomorrow. Regardless, this is clearly a fantastic time to buy.

Array
Jun 1, 2017

I am buying some EOG and PXD at open. I couldn't find much info on FRAK, but due to the name I am assuming it is focused on tracking US fracking companies. What drove you towards that strategy? I picked up US frackers under the idea that they would emerge from the price crash much more lean then before. I've had great returns so far so hopefully oil turns back up later this year.

Jun 1, 2017

Since the OPEC announcement was made in November and the US has grown production 600kbpd and added 100+ rigs in the Permian alone. So, is OPEC going to extend the cuts or allow the US producers to eat their lunch again. Get ready for round 2 of $30 oil.

Jun 1, 2017

While it is definitely cause for concern that US production has grown so significantly, I think that costs of production will keep a cap on a sustained, accelerated rise in US production. What I mean by that is I think that break even costs were as low as they were for US frackers due to lack of demand for support functions by companies. With a rise in demand, these costs should go up leading to a higher breakeven cost.

When it comes to OPECs decision I think that people are currently under estimating the potential for instability if prices were to collapse again. While I think they may hesitate to extend the cuts, they likely are not going to let prices slide back to the 20's or 30s again. But I would never rule out in this market it happening, I would just purchase more in that scenario.

Jun 1, 2017

NAM is picking back up, especially in the Permian. Simmons had a report from their energy conference saying that demand for field guys is so high that a large OFS company turned down a large independent's work order in the Eagleford. Would definitely go long on guys that have holdings in the Permian, thinking guys like PE, APA, PXD. You can probably make a decent return on those over the next 12 months, everything else is going to take longer. If you're okay with buying and holding, offshore/subsea may have some value over the next few years but it's severely depressed right now and probably won't come up for a while.

Jun 1, 2017

"Simmons had a report from their energy conference saying that demand for field guys is so high "

Demand is growing extremely fast.

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Jun 1, 2017

I agree on Permian but I think all of those have priced in higher oil prices already. I just don't see a good buy out there. I think the only play in the Permian is going after the small services or midstream companies with good infrastructure out there, but I can't say I have any names that really like yet.

Jun 1, 2017

I read about a double short with UGAZ and DGAZ...can anyone give a time table when these ETNs go to zero? If that's even possible...

Jun 1, 2017

There's probably some deals to be had in the royalty trusts. Extreme bearishness in general despite profitability, although penny stocks often go lower.

Jun 1, 2017

Just no on royalty trusts. They have pretty much zero flip value, mediocre RoR for long term holds, they be way overvalued in market right now. PV-9% discount rates on blowdown analysis? Give me a break, bro.

Jun 1, 2017

I think when the Aramco IPO comes out next year or so that will throw a major wrench into the viability of US Shale plays. Thus, I'll probably be looking to put a play on that, but I feel everything leading up to that is going in blind given the relative non-compliance OPEC has had outside of Canada, US, and UK.

Jun 1, 2017

I'm glad someone bought up the IPO; Saudi Arabia - which is essentially OPEC, in terms of market power/being the 'marginal barrel' - has a vested interest in keeping prices high. I think the Saudis are willing to stick to cuts internally and try to enforce them with the other OPEC members in order to help keep prices elevated until at least late next year when they go public.

We shall see I suppose, but they are off to a surprisingly disciplined start.

Jun 1, 2017

Yeah, but once the restrictions are off, I'm pretty sure Iraq and Iran will step up to increase production. I think the obligations expire in summer this year.

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

Jun 1, 2017

A number of different opinions/points on this thread so far. Figured I'd just do one post rather than reply to several prior ones.

In rough order of how I saw them:

1) Overall, there's less value around than there was this time last year (obvious). There's some value but probably not a lot. Oil is down YTD given need to see inventory draws in the U.S. Global inventories are moving in the right direction. If we don't see inventory draws sometime this spring when refinery turnarounds abate then that's a problem. Oil was flat YTD until last week but most positively correlated energy names were going down before last week. Likely given investors losing patience. I'd seen some estimates that U.S. oil and NGL focused E&Ps were pricing in low $60 WTI at the end of last year (impossible to pinpoint but ballparking that number seems reasonable). Market has stabilized around $50 (give or take $5) given a number of U.S. producers can grow production roughly within cash flow at that price. Strip moving it's way back to backwardation, which is good.

2) Dakota Access will not improve differentials much (most likely) out of the Bakken. It will improve transportation costs slightly (maybe). Because of the rollover in production there, the Bakken differential to WTI has been less than $2 for a while. Continental Resources has some slides on expected needs for rail takeaway this year. Probably only producers in core of core will grow production in Bakken for now meaning probably not much new need for takeaway. DA will help but it's not a huge deal.

3) OPEC is unlikely to let prices slide back to $20-30. They can't handle that anymore than U.S. and Canadian onshore producers can. The political masters of the oil ministers probably got them to agree in the first place. Since 2014 OPEC has regained about 2 million barrels of market share. The OPEC members that matter (middle east, Nigeria and Libya) are stable to increasing. The bigger story that gets overlooked is the rate of declines elsewhere. Other OPEC producers, like Venezuela, couldn't increase production even if they wanted to. Instead, they've probably been declining for a decade. Cheating may happen to some degree but probably not as much as in the past. Also, non-OPEC ex-US production is also declining meaningfully, primarily China and Mexico.

4) At the end of the day, supply declines and demand increases since early 2015 have put us in a much better position globally. Don't try to predict oil prices over a 6-12 month period. You will likely be unsuccessful. Think about it longer term. Are we in as good of a buying opportunity now as we were this time last year? As I said already, the answer is no. Are there still opportunities? Sure. The mentality of the industry in the U.S., in my opinion, has changed a lot in the last 5 years from being a wildcatting approach to now more of a focus on the manufacturing process of oil and gas production. E&Ps that can grow production within their cash flow, or close to it, will probably be the winners. Some other more idiosyncratic opportunities exist as well but it varies company to company.

"Successful investing is anticipating the anticipation of others". - John Maynard Keynes

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Jun 1, 2017

150k gross locations in the US with $40/bbl breakevens. 200k with $55/bbl breakevens. Thats at least 10-15 years of replacement production available at $40/bbl. We have 200 more oil directed rigs than are necessary for sustaining production at ~9mmbpd. This will not end well.

Jun 1, 2017

why dont you look at investing in an oil company?
ive been looking really hard at BP ...check out my topic "what are you invested in"

Jun 1, 2017

Yes, ive participated in that thread.. it got me thinking of pure crude oil investments as one would when buying the CL futures contract - like an ETF.
Indeed BP has looked attractive, and still does on a NBV basis, but id still prefer strict exposure to the commodity itself.

Jun 1, 2017

Why not XOM, BP, CVX LEAPs? Jan 2013 should give you a long enough horizon as not to lose much value from Theta... assuming you're not holding for more than a year. If you are, just roll to the next furthest LEAP as soon as it is traded.

Jun 1, 2017

I tend to use xop for oil exposure

Jun 1, 2017

I'm not a pure dyed-in-the-wool O&G guy but I've looked at enough of them over the past year and this is how I think about it...though I look forward to hearing from guys here who have grown up in the space. I'm going to caveat this by saying my experience is strictly in the mid- and junior E&P-only space (no integrateds or large-caps).

1. Not really sure what you mean by maturity, but the key here is really understanding the company's capital efficiencies. What is the corporate decline rate and how much E&D capex is involved in producing one flowing barrel? For example, if Company XYZ produces 10,000 boe/d, has a 30% decline rate and capital efficiencies of $40,000/boe/d, then next year it is looking at $120MM of capex. If the resources are there, it's simply a matter of understanding how quickly they deplete and how much it costs to keep production level or grow it. At a more granular level, if you want to understand resource *quality*, you should be looking at the IP and decline rates (and IRRs) of new wells they are drilling and how those comp to other guys in the area, and where the plays themselves fit on cost/return curves. Lots of investment banks (particularly Canadian ones, or energy-focused ones), publish industry reports that cover economics/production by play and producer.

2. Just look at drilling inventory in addition to the usual suspects such as %PDP and %1P -- these are usually touted in investor presentations. For example, if Company XYZ owns 100 sections of land and can do 4-6 wells per section, then it has a "drilling inventory" of 400-600 wells. Based on the average NPV per well (also in investor presentations) you can start figuring out what that inventory is worth.

Also, you should look at how successful the company has been with enhanced/secondary recovery techniques (such as waterflooding), which can extend reserve life and flatten decline curves.

As a final note, I think most market analysts focus too much on production growth and not enough on ROIC and reserve quality.

Again, look forward to more informed input than mine.

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Jun 1, 2017

mrb87, BatMasterson,

Thanks a lot; this is the exact experience-based insights I was looking for. Sorry for my ignorance, but regarding the decline rates, should I take the average production rate over the past 3-4 years or there are some industry empirical figures that I can use?

Regards,

Stay curious

Jun 1, 2017

2. Is it shale (non-conventional) or conventional resources? Shale resources have higher initial production rates (well's IP rate) , hyperbolic production decline curves, and long reserve lives.

As for metrics widely looked at: R / P Ratio (Proved Reserves / Annual Production), which is in years, % Proved Reserves out of Total Reserves, and % of Oil Mix.

Also relevant:

Maintenance Capital Spending =Three-year Average Finding, Development and Acquisition (FD&A) Cost * Current Production.

Growth Capital Spending =Total Capital Spending - Maintenance Capital Spending.

Free Cash Flow = Discretionary Cash Flow - Maintenance Capital Spending - Dividend Payments.

+1 to previous answer.

Jun 1, 2017

For small to mid-size oil companies (or just an oil field in general), it can be helpful to look at BOEPD/well and whether it is increasing or decreasing. This is often used as a measure of efficiency, but it can also tell you something about the maturity of the assets. For a less mature asset base (at least onshore in the U.S.), BOEPD/well will typically be trending upwards, while for a more mature asset base it will be trending downwards. The great thing about this measure is that it's simple to calculate and you don't need to look at a company's assets well by well. Just take BOEPD over the number of wells that they have and do that for several different quarters that you have the numbers for and it tells you something about the quality of their overall asset base.

Jun 1, 2017

thanks for sharing insight!

Jun 1, 2017

5.73%

Jun 1, 2017

really? thought it would be more

Jun 1, 2017

You cannot answer that question without a lot more detail. What specific kind of oil investment?

Jun 1, 2017

The drilling company drills it for $10-20 per barrel, sells it to you and me $120 .. Of course Bush makes a couple dollars per barrel(MINIMUM 2M Per hour) from every oil company who made him a president, and Vice president, Do we even have one? Oh yea the fella that never has been on TV in 2 terms of presidency of George bush and the time he was on TV He had shot someone in the face which was not suppose to be a mistake, He mis aimed...

You know math

Jun 1, 2017

over nine thousand.

on a serious note: banknnyc, wtf are you talking about? if that's not sarcasm I have to say this: you, sir, are an idiot.

Jun 1, 2017

What type of oil investment are you referring to?

Jun 1, 2017

just like people who long and short crude

Jun 1, 2017

Average daily return? Weekly? Monthly? Yearly? Futures? Physical?

Jun 1, 2017

yea, say like futures, yearly returns

Jun 1, 2017

If your John Arnold.... A LOT...

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

Jun 1, 2017

arnold's a gas man

Jun 1, 2017

Yeah, didnt know the biggest crude player off the top of my head.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

Jun 1, 2017

Oil Sands just don't have the same margin as crude production...

Jun 1, 2017
rufiolove:

Oil Sands just don't have the same margin as crude production...

..Yeah but soon enough that isn't going to matter at all.

Jun 1, 2017

depends on where
look at investor presentations for Whiting, Kodiak, Halcon, EOG, Goodrich, LINE, other E&P companies and see what IRRs they get but it will be different depending on play, location in play, completion expertise, commodity pricing, and numerous other factors

Jun 1, 2017

Simple Answer:
Companies that invest in Exploration and Production projects are... Exploration and Production companies. Seriously, most mature E&P companies have enough free cash flow from their current production to fully fund their capital expenditures for new projects. If they don't have enough cash on hand, they typically can raise debt quite easily by selling forward a portion of their proved reserves.

Although there are a number of Energy PE firms that provide growth equity to early stage E&P companies. These companies are usually too young to have enough cash flow to fund their development programs, so private equity investments can be quite helpful. Some energy PE firms that invest at least a little bit in E&P companies are: Riverstone, Encap, Quantum Energy Partners, Natural Gas Partners, Denham Capital, Lime Rock, First Reserve, etc.

Jun 1, 2017

what's so cool about this...

Jun 1, 2017

Sounds like a great company, wishing you all the best :)

Jun 1, 2017

a few options:

1. energy stocks (SU, XOM, WMB, SLB, RIG)
2. futures (no expertise here)
3. energy startups
4. limited partnerships

I'm decidedly in the equity camp, but there's more than one way to skin a cat.

google oil & gas primer or energy industry primer, plenty of resources (http://www.ferc.gov/market-oversight/guide/energy-...). I don't know of any books

Jun 1, 2017

Read Oil 101 by Morgan Downey.

Jun 1, 2017

What do you mean by 'investing in energy?' Just buying some stocks?

Jun 1, 2017

Don't take everything here at face value but this should be food for thought: http://www.telegraph.co.uk/finance/comment/ambrose...

Anyhow, you are a very late mover at this point and break-even costs are pretty high now. The two problems with that: 1) logistical and political constraints have been depressing WTI vs Brent. 2) Even with the spread tightening, there is a lot of potential supply coming to market in Libya, Iran...

But you're asking about shale gas plays?

Jun 1, 2017
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Jun 1, 2017
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