Investment dollars are finding good value in the current low oil price environment, according to a panel of finance professionals who discussed the wealth of finance opportunities found in today’s oil and gas companies, at this weeks' CERAWeek in Houston.
“The past two oil price downturns have been caused by financial markets,” said Roger Diwan, vice president of financial services for IHS. “But this one has been caused by an unexpected oversupply.”
Marcel Van Poecke, managing director for Carlyle International Energy Partners agrees. “It’s a shock,” he said. “People were working on US$90/bbl assumptions. Now Iran will be adding even more supply.”
Yet, the downturn has created opportunities for investments, and the US is attracting more capital than the rest of the world, he said. In fact, up to $80 million has been raised from private equity alone. To put that capital to work, upstream companies must decide whether to drill or to acquire new assets.
“The industry has so far demonstrated enormous resilience,” said Nathan Strik, portfolio manager for Fidelity Research and Management Co. “Demand looks good, so we might have somewhat of a recovery in the near term. When we decide what to invest in, we look at asset quality, returns on capital, and the quality of the management team.”
Also, more mega deals might emerge in the near term. “We’ve seen two blockbuster deals with Halliburton and Schlumberger,” said William Stevens, global co-head of the SESG Group of HSBC Bank. “This might be the return of the big deals. But we have to ask what constitutes real value. We need to find M&A opportunities that marry strategic plans, and that can be very challenging.”
Meanwhile, the service and supply sector is also ripe for investment, said Charlie Leykum, founding partner of CSL Capital Management. “Service companies are seeing a lot of smaller deals, those in the sub-$500 million category. The debt markets are catching their breath, and we are surprised to see the amount of capital that has come to the market. I think 2H 2015 will see even more activity.”
Yet, it’s still early days for deal-making, said Gary Reaves, managing director for First Reserve. “Only four months into it, organizations are still trying to right size their own companies, so I agree that we will probably see more M&A activity in 2H 2015.”
Reaves warns that many companies are being buoyed up by their current hedging strategies, but those hedges will begin to roll off on the latter part of this year. He predicts that more capital will flow to those companies. “A lot of capital is in fear of missing out on the upturn, so we think more capital will flow into the energy industry.”
Image: Jeannie Stell
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