HOUSTON—The U.S. oil industry is coming out of the latest downturn. Within the next few months, the U.S. is expected to pump an average of 10.2 million barrels per day (MMbbl/d) during a month to break the record for monthly oil production set in 1970. On Jan. 26 oil prices hit $66.14.
To increase production operators still need to access capital on relatively short timeframes. How will financial sectors develop new solutions in the coming year to meet industry challenges?
That’s the question posed during the Independent Petroleum Association of America’s Private Capital Conference Jan. 25 to a panel consisting of David Hayes, partner, NGP; Phil Pace, partner, Chambers Energy Capital; Kevin Scotto, managing director of leveraged finance, Wells Fargo Securities; and Brian Thomas, managing director, Prudential Capital Group.
Hayes represented the public markets on the equity front. In 2017 Standard & Poor’s was up 20% and the Dow was up 25%. However the baskets of E&P companies fared differently. Large caps were down 12%, midcaps were down 22% and small caps were down 33%.
“The public crowd said, ‘I like the transparency of the pure play but now all you guys are moving so fast we can’t trust what you’re doing anymore. So stay still, and I’m not giving you anymore money. That’s where we’ve been for the better part of six months. Public equity taps have been turned off and that flows backwards. We feel it is both a challenge and an opportunity,” he emphasized.
Wells Fargo’s Scotto said, “I’d say there’s a tremendous renewed appetite among the banks. That doesn’t necessarily mean that structures are materially changing at this point, but if we rewind that to early 2016, the capacity for a new bank deal—particularly on the private side—was maybe $500 million in size.
“I think we’ve at least tripled or quadrupled that recently, which doesn’t solve all of this but it certainly allows larger deals to happen with an increasingly significant bank component,” he continued.
“On the bank market we went from a period where there were maybe a dozen banks in the, albeit conservative, RDL lending practice. I’d say now 25 to 30 banks are committing to maybe a half-dozen to a dozen deals per year. If you try to roll out the largest possible private deal, I think then there might be up to 40 banks you could go to. That’s a real change,” Scotto said.
Pace’s company was the smallest on the panel. Chambers has 12 employees and manages about $1 billion. In 2017 the company invested about $500 million in about eight transactions.
“We don’t have a cookie cutter. Every asset and every team are looking for a slightly different solution,” he explained. “We generally try to stay small and not compete with the high-yield market.
“The acquisition and divestiture market has been a disaster because it has followed equity down. It has just been stuck. Frankly I would love to see more A&D because a big part of our business is financing acquisitions,” Pace added.
As an institutional investor, Prudential’s Thomas said the role the company plays in the second lien market is one where it is not an in-distress investor. “We look for situations with a two- to five-year horizon where the company plans on changing its business profile demonstrably over that period of time such that this form of junior capital is no longer necessary.”
The company was active during the down cycle. “What we tried to do was find areas where we could add value to companies as a relationship-based institutional investor,” he emphasized.
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