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Continuing the series of Oil & Gas Careers You Didn't Know Existed! here is another article that presents an exciting new venture--investment banking and private equity (PE). Not known widely, but the investment banking sector has an increasing demand for petroleum engineering graduates or energy sector graduates. Interestingly the profile starts with the common technical knowledge of the petroleum world but slowly expands to economics, management, and global energy situations. To know more about this, we approached Avinash Mohapatra, senior associate and geoscientist for acquisitions and divestitures (A&D) at Houlihan Lokey and is responsible for geological and petrophysical evaluation. He has engaged in several notable A&D and merger and acquisitions (M&A) transactions over $3 billion.
The most striking thing about the recent symposium put on by SPE's Gulf Coast Section was the more than 100 people in the room. During the breaks, it was nearly impossible to have a conversation without a mention of how good it is to be back meeting people in person and shaking hands, like it was before the COVID-19 pandemic. Things, indeed, are looking a lot better. The feeling that day, and the message from speakers at the Acquisitions and Divestitures (A&D) Symposium, offered an upbeat outlook for those buying and selling assets and, perhaps, a path for more such gatherings. "Last year, everyone was focused on liquidity and lenders and how many people I am firing this week and cost reductions and mergers and acquisitions," said Doug Reynolds, managing director for Simmons Energy, a division of Piper Sandler.
Working with clients who are looking to buy upstream oil and gas wells, I almost always hear, “We don’t want stripper wells.” Now that the recent heyday of US unconventional wells is also waning, this often goes along with, “We want conventional production.” With gas prices having been relatively low the past couple of years, it is often, “We want oil-weighted production.” I am used to unicorn hunts and impossible asks, so I thought this was something reasonably doable. After a long year in a terribly gridlocked acquisitions-and-divestitures (A&D) market, I started thinking about it a little more. Most of the conventional packages that were coming to market had low-rate wells with many inactive wells tagging along. We were evaluating a lot of deals but were seeing several fail due to plugging and abandonment (P&A) liability and the inability of low-rate wells to handle the General and Administrative (G&A) structure of clients. One client group was competent and ready to deploy capital, and we had gone on the hunt for off-market deals adjacent to their current production. Our team initially found 19 interesting assets, based on size and proximity, and was pleased to find that nine of the 19 had operators who engaged as seriously interested in selling. Our client turned down all nine assets. Every one of the nine assets was cash flow positive (surprisingly in 2020), in the right region, conventional, and the right size. Every one of the nine was turned down because of the large number of inactive and low-rate wells. In a depressed A&D market with the lowest deal counts in over a decade, having nine assets rejected immediately was frustrating. We decided to screen out assets with low-rate wells and high inactive well counts before making calls and engaging sellers. I downloaded data from all the wells in a Rockies state, screened for current production to get a flowing barrel comp range representing the right deal size, looked for oil-weighted properties, took out unconventional wells, added a rate cutoff around 20 BOED per well, and applied a cutoff where reported inactive wells made up less than 50% of the total well count. Out of about 400 to start with, there were three assets left - only three. At first, I thought that had to be wrong. I knew that US onshore conventional production probably had a large number of low-rate wells, but it seemed reasonable that there would be several assets that had wells doing 20–30 BOED. Thinking about it more, I sent a text to a colleague: “I bet US onshore conventional production is actually dominated by low-rate wells.” I then pulled data for the Texas Gulf Coast because I had another group looking there. The results were shocking: 97% of the wells were 15 BOPD or below. All these clients want conventional assets without stripper wells - but they are all stripper wells.
A private-equity firm has agreed to put in $900 million to start a company that will buy US oil and gas operations with a focus on finding more oil. The equity investment by Oaktree Capital Management is far below the records set when the industry was looking up, but with acquisitions activity at a crawl, the timing is striking. The funding was raised by two executives from the management team of Felix Energy, a company whose timing was serendipitous– it closed its sale to WPX Energy on 6 March 6, just as energy markets were beginning to recognize the devastating impact COVID-19 would have on oil demand and prices. Now, they appear to be among the first to raise cash to go bargain hunting. "We understand the [acquisitions] opportunity set requires a sizable equity commitment as well as flexibility and creativity when structuring transactions. Our partnership with Oaktree fulfills each of these requirements, which will be a key differentiator for us," said Ben Jackson, FourPass Energy CEO, in the announcement.
Unlike what happened during previous oil-price collapses, merger and acquisition (M&A) activity has been limited since prices started to fall in 2014. But the signs are that M&A activity may be building, and oil company management teams should think about which deal strategies they should pursue. The oil-price trend has historically been one of the most important determinants of how value is created in the oil and gas industry, and some M&A strategies that worked in the rising-price environment over the past 15 years may not work in today's market. This article examines the industry's M&A performance across cycles back to 1986 and identifies strategies that could help companies create value through the price trough, measured by total returns to shareholders. Most commodities industries are prone to consolidation during the downside of the cycle, when supply surpluses accumulate, prices fall, and competition heats up.
Price recuperation in the commodity markets coincided with renewed activity in the Permian Basin and elsewhere in the US onshore. Premium acreage costs in the Permian have increased industry interest in acreage swaps, divestment, and merger and acquisition (M&A) activity. This prolific basin will be center stage for many years to come. Although commodity markets have not fully recovered to 2014 levels, they have come a long way from their nadir at the start of 2016. This market recuperation has allowed the oil and gas industry survivors to lick their wounds and get out of the red.
Andy Rogers, vice president of business development at Encana, shares his thoughts on the current state of the industry and provides career advice to young professionals amid the acquisitions and divestitures (A&D) landscape. The low commodity prices of 2015 have left some companies financially challenged and others with opportunities for business growth by means of A&Ds. For young professionals working in the industry, this can mean many things, such as the opportunity to work in a new asset or technology area, changing career streams, and even the opportunity to return to school. For example if your company has sent out a strategic plan to "balance their strategic mix," it is a good indicator that the company is trying to be oilier or gassier, depending on its current portfolio. If the company is trying to become oilier, it does not take a genius to figure out that the company has to sell its gassier assets and/or aggressively develop or buy more oil assets.
In the wake of the 2008 financial crisis, the investment banking industry was vilified by most of US (and perhaps rightfully so) as one of the main facilitators of "The Great Recession." We cheered on as the industry was subject to an onslaught of new federal regulation, forcing many investment banks to slash thousands of jobs and drastically cut compensation for those on Wall Street. It is almost poetically ironic that with the recent downturn in the energy industry, investment banking (specifically energy investment banking) is well-positioned to not only weather the storm, but flourish in the current environment. Those who have followed the market closely in recent months are likely aware that the drop in commodity prices has forced many operators and service providers to slow production, cut costs, and restructure their current portfolios. The general consensus of industry experts is that it is only a matter of time before the industry sees a sizeable wave of merger and acquisition deals and consolidation. Consequently, energy investment banking groups are not only capitalizing on said restructuring, but will be one of, if not the main, beneficiaries as many companies in the industry will be forced to sell off assets and/or consolidate.
Corporate mergers and acquisitions (M&A) in the US exploration and production (E&P) space have occurred at a pace of about three to four public company mergers per year for the past decade. This pace does not appear correlated to commodity price swings. Despite the two recent episodes of severe price declines, one in late 2008 and another in late 2014, it does not appear that companies are choosing to take advantage of "cheap" valuations as a result of commodity price, and the resulting stock price, declines. In actuality, Figure 1 shows M&A activity tends to slow down when commodity prices move dramatically (high or low) and resumes after a period of sustained prices. So what motivates companies to make corporate acquisitions?