I am an incoming SA at at BB in Houston. Given the current market conditions in oil and gas, what is the longevity for oil and gas banking / will banks cut the amount of full time offers they give out within their oil and gas banking practices. Any thoughts or comments are appreciated.
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Current analyst in O&G, but would consider myself as bearish on the industry. Oil has always been known as boom or bust, but in some ways I see the U.S. industry against the shot clock of peak oil demand in the next 10 years and entering a secular decline.
The negative shift in investor perspective on fracking (demanding cash flow generation) has only been worsened by the SA/Russia supply glut and Corona demand declines in the last few weeks. This all came to a peak when oil dropped into the $20s two weeks ago, and we watched companies that were $1-$2bn market cap at the beginning of the year became $150-$300mm in a flash. The investor sentiment has shifted to classifying companies that can either transition to low-carbon alternatives or generate cash as the industry declines (cigar-butt investments).
Shifting to direct impact on IB, there will be plenty of near-term restructuring work for the EBs that operate in the space, debt deals to ensure liquidity for the bigger players, and eventually consolidation via M&A to survive. However, on the M&A side, these expected deal equity has contracted in size by ~50-70% due to the current environment which would also reduce the fees as expected. I see down sizing of non-restructuring teams as inevitable, however happening more-so for the VP/Associate teams since Analyst are cheap and short term.
That said, this will be an unprecedented summer with potentially a WFH structure or reduced office weeks. Would be extremely nervous to be an incoming summer associate due to shift in the last few months. For SAs, I could see a reduced return offer rate for the larger classes or more focused-EBs (A&D shops or OFS focused). I saw this occur last summer with an firm that dropped return offers to ~60-70% when the precedent had been 100%.
If I was an SA, I would do some deep thinkingand at the minimum have an idea of a contingency plan. Obviously being an analyst in 2021-23 will be a different experience from today, but if you are looking at the value destruction that has occurred in the industry, it is difficult to provide catalysts for the U.S. to return to the glory days when oil was $100. I would also consider the exit opportunities, which are mostly energy PE, that would also be downsizing or disappearing in the next year. Look at the recent struggling fund raises in the space or Warburg canceling their second energy fund. It’s just hard to say the options will be there.
Overall, I would just focus on what you can control. That would be (a) how you perform in your internship to secure a return offer and (b) laying the ground work for a back-up plan or relocation.
I want to make sure I stay away from comment on return offer rates and the like because that’s ultimately something very serious and something that I will be totally guessing. Take in all of the information I’ve said with a grain of salt rock because my family has been involved in the industry for some time now and I am clearly biased
They are easily the strongest in the space right now. They are also heavy lenders, and one of the first calls for M&A for companies. Their closest M&A competitors, EVR, rely heavily on sponsor driven M&A activity and with lack of new funds raised this year and likely next year, IMO EVR M&A activity will slow down in the US (for Energy). Citi has been involved with industry operators for a long time now and use it to drive advisory M&A. I started working at my firm recently after an SA stint, and I can say that every single “bake-off” I have been on has seen Citi involved in some way. Also, Steven Trauber is quite simply the best. While he was at UBS, they were top tier and dominating the league tables. He and his bankers left to join Citi and now they dominate the league tables and UBS is left pitching DrillCo deals to everyone.
Field prices in the Permian were $7 today. Great industry to hitch your wagon to!
Recruited heavily in Houston and ended up turning down summer associate offers pre COVID demand shock. There was just a somber vibe which I can only imagine has been exacerbated in the time since. Despite finding the industry fascinating, I couldn't shake the feeling that the IB scene was in decline.
This doesn't mean that IB won't exist, but it does mean that (particularly post-mba) you are choosing to face an uphill career battle as capital market activity remains subdued, overall deal value tanks, and banks reduce or freeze headcount as you try to climb the ranks. Couple that with reduced exit opportunities and an entire city still largely built around O&G and it paints a scary picture.
In the near term, EBs are poised to generate fees with RX, but for many, that's not why they got into O&G IB. the BB picture is hard to stomach. The promised E&P consolidation has grinded to a halt--who would fund with debt, and what takeover target wants to be compensated with stock?
It's a bummer, such a cool space, the shale boom was amazing, but getting decimated by a variety of factors with no realistic end in sight.
I think everyone is overreacting.
I generally agree that its an overreaction. However, I live in Houston and follow the industry closely and there are some questions of viability enough to have me questioning whether or not to buy a house here.
The capital markets shunned oil in gas in dramatic fashion pre-covid. Even conventional assets with strong cash flow profiles. They can say its for ESG reasons, but I think ESG is one of the many risks that make it easy for capital to say no. If people were spitting out cash, I think there would be plenty of debt and equity around.
The oilfield services market has been broken since 2008. Look at the margin profile of some of the biggest players even in $100+ oil times... They cut pricing in 08/09, never properly regained margins, and then private equity and IPOs flooded the space with equipment just prior to and during the 2016 bust. This led to a continuous price decrease that is leaving even good companies with horrific gross margins, and quite often negative EBITDA margins. Shit, I was looking at a couple public OFS companies with negative gross margins.
So lets hypothesize that the large E&Ps make it through the saudi-russia pissing match... Their drilling, completions, and overall lifting costs will eventually rise to accomodate an oilfield services industry that consolidated during the same period with creditors demanding they improve their pricing power. Breakevens as advertised are artificially low for the time being, with the losers being the services companies.
Everything that I'm reading shows crude demand increasing for another decade, and natural gas demand increasing until 2050 (give or take a decade). Lets just focus on the problem this poses for crude - if you (a) have public equity and traditional debt markets shying away from you for the risk adjusted returns profile (and the bonus of ESG statements), and (b) private equity markets worried about the overall time horizon - i.e. if oil has a 10 year run, the exit multiple after a 4-6 year hold will be materially lower because the strategic on the other end is running a dcf with pricing assumptions considering the demand decline. You're just left with mezzanine debt type investors in the space...
Apologies for the rambling thoughts... quarantine got me fucked up.
Renewable energy makes up around 4% of US energy consumption. Oil 1/3rd, Gas 1/3rd, coal/nuclear/bio-fuel/other the rest. If you think oil is doomed, and you don't want nuclear, and we all know coal is doomed, then where are we getting the energy??
Houston is fine, O&G is will recover, and this forum is overreacting.