Oil price Rise, future of IB
Wanted to get some thoughts from you energy bankers out there....
With oil on the rise at around $70/barrel, and with Saudi wanting to push for something close to $100/barrel (might only be short term for their Saudi Aramco IPO), what do you think that holds for the future of IB? Do you think we'll have another flurry of M&A followed by a round of restructuring? I don't really think that too much north of $70/barrel is sustainable given that there are so many alternatives out there; I think that overall demand would be pushed down if we try to get close to $100/barrel. Correct me if I'm wrong on that thought process.
Also wanted thoughts as someone that is about to start B school this fall (2018) at a energy bank target school, and am weighing the options between BB v EB (know that there have threads on this). I know that some EBs perform well in a downturn, winning rx work (jeff, laz - though apparently some don't like TPH) and that BBs don't perform as well since they can't do the rx work, which might mean more layoffs. Although I do think that BBs provide a better platform for career bankers (not sure that's what I want to do, although a definite possibility) since they will usually get a larger rolladex of clients (which is what career bankers need I think more than anything - need to bring in $$) and work slightly less (not as lean of deal teams), EBs will definitely not be laying off as much in the downturn since they can do rx work, and the work overall is probably more interesting since they don't have as much regulatory crap in mix. Also hear ECM and DCM get old pretty quick.
Would like you thoughts on both topics (future of IB in higher oil priced environment and piggybacking off of that, BB v EB given the situation)
Im confused...are you saying that there will be a downturn once we get $100 oil? There will always be cycles in O&G, so pick the place that you like the most and perform well. Its a long-run business.
True, it was more of a post to try and see the timing (when as opposed to what) and other people's thoughts on timing of the downturn. I wanted to see if you guys would agree that at about $100/barrel the downturn would begin. And then seeing if that should affect my recruiting strategy
Equilibrium around $65-80
over 80 we get 2010-2014 again with insane amounts of drilling to bring the price down shortly.
if we hit $100++ it will last until drilling catches up and end up in another glut.
Given some recent activity (RSPP/CXO deal, Brazos midstream, TPG Pace/EnerVest), the M&A/A&D train is off and rolling. That, coupled with several well known diversified operators divesting assets and moving to pure-play Permian models, would indicate more deals will be done to acquire and develop assets.
Oil bull price trends: - several drawdown reports from EIA have shown analysts underestimating demand growth and supply is not replenishing draws at the large storage facilities (Cushing/Henry Hub) - Expected further production cuts from Russia/OPEC will continue to apply upward pressure on brent - Weakening production outlook and going-concern for Venezuela
Grey area: - While US tight oil continues to be the swing producer, there are new concerns about 1) takeaway capacity and 2) grade of oil being produced. In the permian specifically, operators are experiencing difficulty with pipeline capacity, more so with gas than oil, but if you look at realized prices, they are realizing significant discounts to benchmark NYMEX prices, and further, may look to flare off their gas production altogether rather than pay full freight to market. On the latter concern, oil gravity on average being produced by horizontal drilling in the permian is much lighter than US refineries are used to handling. Refiners need to realize certain crack spreads on their crude purchases and with the light grav oil being produced, realized less margin and fewer distilled products per barrel. This is normally offset through blending with heavier crude (Canadian, Mexican, midcon), but that is now in shorter supply than before. I think this will hamper some of the drill-baby-drill attitudes out there to an extent.
Operationally, public independents have been warned they need to live within their cash flow ie. not outspend on CAPEX or their share prices (and by extent management comp) will be hit hard by activist investors. There are definitely companies that can sell acquisitions to their investors as value add, but with the bad taste of the liquidity issues from the last downturn, some will face a serious issue with trying to raise debt for acquisitions. I think Concho's use of stock in their acquisition of RSPP is a good indication of this.
Overall, I expect to see a significant uptick in acquisitions, albeit to a lesser degree than if the industry had not experienced such a cash crunch just 2 years ago. The Permian is going to continue to be hit hard with drilling programs however the takeaway constraints mentioned above may create a ceiling on production until more midstream infra gets developed, specifically in the broad and sparse Delaware basin. We may be a couple years out from experiencing a glut of the magnitude of 2015.
From a career standpoint, you will get to watch the industry evolve for a year or so before looking for a job and hopefully you will be able to see where the market is trending towards. I would think that in that time period if take away capacity has not caught up with production and supplies at major hubs remains below or at average capacity, you could feel comfortable with a BB. I would note just from reading A&D news letters that I have noticed more EBs as advisors just due to the relative size of some of these deals may not meet BB levels.
very helpful response, SB for sure
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