Oil and Gas Going to Shit...Effect on O&G IB?

Title pretty much says it all. What effect does this oil slump have on IB careers in the O&G industry?

Comments (25)

 
Most Helpful
Dec 20, 2018 - 1:37pm

Overall, the industry is very attractive to banks for two reasons: O&G is incredibly capital intensive and project-based. In order for a firm to make money, firms need to first spend (raise) money. Because each well has a finite life, firms need to continue to drill new wells (which requires more capital). In order for a firm to drill a well, they must first own the acreage/mineral rights. This translates to repeat business for banks in the capital markets and high A&D activity as firms buy/sell acreage.

"Normal" levels of cyclicality in oil and gas commodity prices are actually good for banks because it stimulates M&A/Cap Markets activities, e.g. when prices are high, firms have excess cash for acquisitions, etc. and when prices are depressed, firms tend to divest non-core assets to create cash.

Obviously prolonged levels of depressed commodity prices and a bearish outlook on the industry is not good. If this slump continues, there will likely be a large slowdown in capital markets activity in the upstream vertical (as it is increasingly less economic to extract hydrocarbons) and overall slower M&A activity due to lower cash flows. These factors obviously hurt banks who primarily provide these services. E&P companies with higher breakeven costs and OFS companies will be hit the hardest; the lower cash flow stream might cause them to violate covenants, default on interest, etc. which leads to increased restructuring deal flow for key banks.

Array

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Dec 21, 2018 - 9:33am

Awesome overview. I'd just add that prices are still economic for most operators in the US. Drilling activity will slow but producers will be find (for the most part). Besides, its all OPEC BS anyway - prices will bounce back.

 
Dec 21, 2018 - 8:36am

If my knowledge is correct, TPH launched a new Calgary office with like 15 people in the midst of the 2016 downturn.

The good banks will thrive on the volatility, the shitty banks will lay people off. Capital markets will be tough, especially oilfield services, for a good while. It could be a year before a relevant O&G IPO happens, but believe me there will be some decent M&A around the corner.

 
Dec 21, 2018 - 2:14pm

You're a bit off. Over a career as a banker, volatility is expected, however deals are boom or bust for O&G.

2015 might have had 3 notable deals off the top of my head. One of them fell through and was cancelled.

2017 and 2018 each at least 10 +$5B.

 
Dec 21, 2018 - 2:13pm

rip DB O&G

What concert costs 45 cents? 50 Cent feat. Nickelback.

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Dec 21, 2018 - 2:47pm

pretty sure that's more of a knock on DB and not the space in general

midstream restructuring will take a pause because most of the restructuring has taken place, but as companies remove IDRs and start retaining more cash, there will be more capex and potentially expansion. maybe not a great time for RX and M&A unless we see a consolidation, but DCM should be just fine as well as the space in general

 
Dec 21, 2018 - 3:14pm

touche

What concert costs 45 cents? 50 Cent feat. Nickelback.

 
Dec 21, 2018 - 3:27pm

This is a far overstep in connecting correlation with causation. DB fell because they were a terrible bank, not because of the industry. As a note, some of the energy banks had their biggest years ever at the same time that DB was collapsing.

 
Dec 21, 2018 - 2:23pm

There is a shift in strategy in the O&G world. E&P companies are focusing on generating free cash flow rather than production growth, which means they can fund more of their operations internally. That is the goal at least. And that means less capital markets activity. M&A goes hot and cold, but if the industry is crap, that will decline as well. O&G was a honey hole for bankers for several years (2010-2015), deals deals deals, both M&A and cap markets, now it's coming back full circle. I think we are learning that shale companies generally don't create any value with crude

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Dec 21, 2018 - 3:35pm

[quote="Texas Tea"]
There is a shift in strategy in the O&G world. E&P companies are focusing on generating free cash flow rather than production growth, which means they can fund more of their operations internally. That is the goal at least. And that means less capital markets activity. M&A goes hot and cold, but if the industry is crap, that will decline as well. O&G was a honey hole for bankers for several years (2010-2015), deals deals deals, both M&A and cap markets, now it's coming back full circle. I think we are learning that shale companies generally don't create any value with crude PE has thrown so much money into this system that there are too many shale companies, too many shit management teams running them. There is no public market exit (used to be a problem for gas players, now its all players) and the private money is stuck with a buffet of portcos that they cannot sell and cannot merge unless someone blinks on valuation and takes a loss. At recent 60 dollar oil, you could stomach some div recap deals for the right companies, now even that option is toast. I guess we see another round of restructurings, more zombie co's and some M&A of higher quality companies. The institutional money for PE will have to say no mas at some point and stop this nonsense.

 
Dec 21, 2018 - 7:12pm

dutchduke]<br /> [quote=Texas Tea:

There is a shift in strategy in the O&G world. E&P companies are focusing on generating free cash flow rather than production growth, which means they can fund more of their operations internally. That is the goal at least. And that means less capital markets activity. M&A goes hot and cold, but if the industry is crap, that will decline as well. O&G was a honey hole for bankers for several years (2010-2015), deals deals deals, both M&A and cap markets, now it's coming back full circle. I think we are learning that shale companies generally don't create any value with crude PE has thrown so much money into this system that there are too many shale companies, too many shit management teams running them. There is no public market exit (used to be a problem for gas players, now its all players) and the private money is stuck with a buffet of portcos that they cannot sell and cannot merge unless someone blinks on valuation and takes a loss. At recent 60 dollar oil, you could stomach some div recap deals for the right companies, now even that option is toast. I guess we see another round of restructurings, more zombie co's and some M&A of higher quality companies. The institutional money for PE will have to say no mas at some point and stop this nonsense.

This guy gets it. Whoever is throwing monkey shit is just not there yet. I think there is one public (non-major) E&P I'd own right now with confidence.

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Dec 21, 2018 - 7:17pm

But multiples are relative... when everyone's multiple is compressed it doesn't matter... no one has a premium currency. IF they do have that premium currency, means they have the best combination of management/balance sheet/asset quality. Because the management team is quality, they know that M&A doesn't work, especially in the E&P world. There is reason they trade at that premium multiple.. why mess it up with ill-fated M&A?

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