Q&A: Opportune’s Women in Energy Share Perspectives on Oil & Gas Industry Trends
Buoyed by crude oil prices hovering over $60 per barrel (/bbl), oil and gas merger and acquisition (M&A) deal activity hit four-year highs in 2018 totaling about $82 billion. That momentum ground to a halt a halt in October last year when crude oil prices dropped more than 40% to about $42/bbl.
This hangover in oil and gas M&A activity has carried over so far into the first three months of 2019, falling to a 10-year low of $1.6 billion—a 93% decline from 2018, according to analysis by DrillingInfo. Since the pullback in oil prices in October last year, however, oil prices have rebounded by about 20%. In an industry where cost-cutting and debt servicing remain top priorities, the need for operational and growth capital is as large as ever and is challenging private capital providers.
These topics and more will be discussed at the Kayo Women’s Energy Summit in Houston, Texas on April 16-17. Opportune, a proud sponsor of the event, will be represented by Amy Stutzman, Managing Director in Opportune’s Complex Financial Reporting group, and Byrony Coan, Director in the firm’s Upstream Transactional Advisory team.
Stutzman will be speaking in a panel discussion, titled “Evolution of Private Equity Strategies in E&P”, highlighting how private equity strategies in the upstream oil and gas sector are evolving and, through new structures and joint ventures, how private equity backers are working with corporates to develop and ultimately monetize their projects.
Meanwhile, Coan will moderate a panel, titled “The Early Days of an E&P Company”, which will explore the process of finding assets, performing due diligence, securing capital and building it into a real company, as well as highlight how companies can communicate their ideas to private equity investors and develop a 100-day plan.
CLICK HERE TO READ AMY STUTZMAN AND BYRONY COAN'S ARTICLE, "THE FIRST 100 DAYS", IN OIL & GAS INVESTOR
Leading up to the event, Stutzman and Coan share their unique perspectives below on what trends they see shaping the oil and gas industry.
Generally, what overarching trends are you seeing with respect to M&A activity and/or private equity occurring in the oil and gas industry?
Stutzman: The days of “build and flip” are over. We’re still seeing creative financing mechanisms, such as joint ventures and “drillcos” being executed. There is also more focus on water assets and some interest in minerals. Existing management teams are trying to be the “consolidator” in their particular basin rather than be consolidated.
Coan: Two of the most common trends we are seeing regarding M&A activity involve both the size and location of deals. Due to the current cost-per-acre in the Permian and lack of capacity, we are seeing a shift to more unconventional plays in existing fields. We are also seeing much smaller transactions ($100MM-$200MM deals) involving purchases of older, existing vertical wells with the goal of transformation through technology to increase production. We are also seeing a continued upward trend with private equity-backed firms creating new entity structures for small and targeted plays involving less popular fields.
What challenges/opportunities do you commonly see faced by oil and gas companies during M&A transactions and/or private equity deals? How does Opportune add value?
Stutzman: Since public E&P operators are seeing increased pressure from investors to meet capital discipline they’re keeping their teams lean. For example, Laredo Petroleum Inc. recently announced that it cut about 20% of its 340 employees, or about 10% of its workforce. So, companies call on Opportune to help them through M&A transactions with due diligence and asset integration support, for example.
Coan: Many of the clients Opportune interacts with involve private equity-backed deals with an executive team and between one and two expert employees (i.e., geologist, operations, landman, etc.). These teams are highly specialized in the ability to find profitable deals, but may need assistance in walking the transaction from the data room to revenue distribution. Opportune’s role is to add value through expertise in every step of the process, whether it be transactional advisory, due diligence or true back-office assistance.
What are some key considerations to keep in mind when making oil and gas asset transactions?
Coan: When considering an oil and gas asset transaction, it is important to focus on a smooth transition from buyer to seller. Negotiating a favorable transition services agreement is critical to the success of a transaction as it can set target dates to allow both sides to agree upon a reasonable timeline and level of effort based on current staffing.
What might be some ways oil and gas companies can do to thrive in good and bad times?
Stutzman: In a cyclical industry beholden to the ups and downs of commodity prices like the energy industry, it is imperative that companies not get caught overextending themselves during the good times and be ill-prepared during the bad. At Opportune, we encountered clients that often overextended themselves during the shale boom between 2009-2013 until the crash hit in late 2014 when many companies filed for bankruptcy and we stepped in to find out many of the causes were preventable.
Coan: The energy industry is notoriously cyclical. It is crucial for a successful oil and gas company to make sure they are not overleveraged during the good times, as well as underprepared for the bad times. Keeping a reasonable balance (i.e., cash reserves) at all times allows you to weather the cyclical nature of the industry.