Released September 04, 2019 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Across the U.S. and in the state of Colorado, the Oil & Gas industry is going through a wrenching period of strategic change that is likely to result in further consolidation, panelists told the 31st annual Energy Summit held late last month by the Colorado Oil & Gas Association (COGA) (Denver, Colorado).
"Consolidation is the topic of the week," Paul Schulman, a managing director at Mackenzie Partners (New York, New York), told several hundred COGA conference attendees on August 28. "Dissatisfied (institutional) investors create opportunities for activist investors." Mackenzie Partners is a proxy-services company.
In a comment echoed in spirit by other co-panelists, Jonathan Cox, global co-head of oil and gas investment banking at J.P. Morgan (New York, New York), said, "The current challenges are key to the industry's resurrection."
The current challenge, panelists agreed on August 28, was "free cash flow yield," a financial solvency metric that did not exist a year ago, Jennifer Samuels, vice president of investor relations at SM Energy Company (NYSE:SM) (Denver) told attendees at the COGA conference. Free cash flow yield is the product of dividing a company's free cash flow per share by its current share price. It provides investors with an up-to-the-minute measurement of their returns from their investments.
Investors' heightened focus on oil and gas companies' financial solvency stems from the precarious finances of many independent exploration & production (E&P) companies, shown in part by the 28 Chapter 11 bankruptcy filings made through mid-August by U.S. E&P companies, according to Haynes and Boone LLP (Dallas, Texas). That's nearly as many filings as were made in all of 2018 and more than the number of filings made in 2017, the firm noted in its August 12, 2019, "Oil Patch Bankruptcy Monitor."
Click on the image at right to see a cumulative total of Chapter 11 filings from E&P companies.
"Investors are in a particularly risk-averse frame of mind now," Samuels commented. "The equity and high-yield markets are effectively closed to energy. Energy is out of favor. Free cash flow and free cash flow yield are all investors care about."
Cox, the J.P. Morgan banker, commented: "Investors' concerns about trade and a possible recession have eroded confidence and driven a move to safer investments," such as bonds and gold. "Gross domestic product is the biggest driver for the oil and gas sector, and right now, the sector has the wrong kind of supply concerns--it is producing more than consumers are consuming."
Many analysts predict a near-term future where global oil and gas production continues to exceed demand, leading to relatively soft prices. For more on that, see August 16, 2019, article - U.S. Oil Production Could Hit 16 Million BBL/d by 2023.
The J.P. Morgan banker observed that it's harder to run a business when fundamentals are weak, prices are volatile and the cost of capital is rising.
He commented that there's "not a lot of capital seeking to enter the Denver-Julesburg basin right now. Self-inflicted regulatory wounds" have heightened investment risk in the Centennial State and hurt its attractiveness. Schulman of Mackenzie Partners agreed: "The operating environment in Colorado has deteriorated. Companies now need a social license to operate in Colorado, and that has hurt companies."
Cox urged E&P companies to "be lean, have great rocks and have robust cash flow."
"Producers have for years been paying dearly for future growth," the banker said, in a comment that could apply equally to E&P firms operating in Colorado as well as in Texas, North Dakota, the Marcellus Shale and elsewhere. "But now the market is insisting on free cash flow, and further insisting that those funds be returned to them. Investors may not understand the differences between the Permian and the Niobrara, but they understand cash," he told several hundred attendees at the conference. For more on the changing expectations of oil and gas investors, see August 19, 2019, article - Oil Executives Pledge Financial Probity, Environmental Protection at Denver Conference.
"When companies start generating free cash flow, and they return it to investors, oil and gas companies will be viewed more favorably," Cox predicted.
The banker's prediction was echoed by Richard Betz, a partner at Lithos Resources (Calgary, Alberta), an investment company focused on the E&P segment. Prior to that, he was chief executive of Resolute Energy, which earlier this year merged with Cimarex Energy (NYSE:XEC) (Denver).
"The sector will be back in favor again," Betz told COGA conference attendees. "This industry, more than most, goes through cycles. When this cycle ends, we will have stronger companies and higher valuations."
Betz said there were fewer private equity (PE) funds looking to make so-called "bolt-on" acquisitions in the sector. "I have talked to 12 PE firms that want to exit their investments, but there are no buyers. Private investors may have to change their expectations by holding onto their (oil and gas) investments longer and accepting lower returns." He said the PE business model is changing: "it's no longer a business where investments are held for three to five years, and then flipped to another firm or go public through an initial public offering."
"While valuations are under pressure now," Betz said, "markets are great at seizing opportunities. I expect some assets will soon have different owners with different expectations." These new investors will be "less concerned about quarter-to-quarter pressures" and more inclined to invest for longer durations. "This industry is phenomenal about reinventing itself as market conditions and operational realities change. I firmly believe it will emerge better and stronger" from the current crisis, Betz said.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
"Consolidation is the topic of the week," Paul Schulman, a managing director at Mackenzie Partners (New York, New York), told several hundred COGA conference attendees on August 28. "Dissatisfied (institutional) investors create opportunities for activist investors." Mackenzie Partners is a proxy-services company.
In a comment echoed in spirit by other co-panelists, Jonathan Cox, global co-head of oil and gas investment banking at J.P. Morgan (New York, New York), said, "The current challenges are key to the industry's resurrection."
The current challenge, panelists agreed on August 28, was "free cash flow yield," a financial solvency metric that did not exist a year ago, Jennifer Samuels, vice president of investor relations at SM Energy Company (NYSE:SM) (Denver) told attendees at the COGA conference. Free cash flow yield is the product of dividing a company's free cash flow per share by its current share price. It provides investors with an up-to-the-minute measurement of their returns from their investments.
Investors' heightened focus on oil and gas companies' financial solvency stems from the precarious finances of many independent exploration & production (E&P) companies, shown in part by the 28 Chapter 11 bankruptcy filings made through mid-August by U.S. E&P companies, according to Haynes and Boone LLP (Dallas, Texas). That's nearly as many filings as were made in all of 2018 and more than the number of filings made in 2017, the firm noted in its August 12, 2019, "Oil Patch Bankruptcy Monitor."
Click on the image at right to see a cumulative total of Chapter 11 filings from E&P companies."Investors are in a particularly risk-averse frame of mind now," Samuels commented. "The equity and high-yield markets are effectively closed to energy. Energy is out of favor. Free cash flow and free cash flow yield are all investors care about."
Cox, the J.P. Morgan banker, commented: "Investors' concerns about trade and a possible recession have eroded confidence and driven a move to safer investments," such as bonds and gold. "Gross domestic product is the biggest driver for the oil and gas sector, and right now, the sector has the wrong kind of supply concerns--it is producing more than consumers are consuming."
Many analysts predict a near-term future where global oil and gas production continues to exceed demand, leading to relatively soft prices. For more on that, see August 16, 2019, article - U.S. Oil Production Could Hit 16 Million BBL/d by 2023.
The J.P. Morgan banker observed that it's harder to run a business when fundamentals are weak, prices are volatile and the cost of capital is rising.
He commented that there's "not a lot of capital seeking to enter the Denver-Julesburg basin right now. Self-inflicted regulatory wounds" have heightened investment risk in the Centennial State and hurt its attractiveness. Schulman of Mackenzie Partners agreed: "The operating environment in Colorado has deteriorated. Companies now need a social license to operate in Colorado, and that has hurt companies."
Cox urged E&P companies to "be lean, have great rocks and have robust cash flow."
"Producers have for years been paying dearly for future growth," the banker said, in a comment that could apply equally to E&P firms operating in Colorado as well as in Texas, North Dakota, the Marcellus Shale and elsewhere. "But now the market is insisting on free cash flow, and further insisting that those funds be returned to them. Investors may not understand the differences between the Permian and the Niobrara, but they understand cash," he told several hundred attendees at the conference. For more on the changing expectations of oil and gas investors, see August 19, 2019, article - Oil Executives Pledge Financial Probity, Environmental Protection at Denver Conference.
"When companies start generating free cash flow, and they return it to investors, oil and gas companies will be viewed more favorably," Cox predicted.
The banker's prediction was echoed by Richard Betz, a partner at Lithos Resources (Calgary, Alberta), an investment company focused on the E&P segment. Prior to that, he was chief executive of Resolute Energy, which earlier this year merged with Cimarex Energy (NYSE:XEC) (Denver).
"The sector will be back in favor again," Betz told COGA conference attendees. "This industry, more than most, goes through cycles. When this cycle ends, we will have stronger companies and higher valuations."
Betz said there were fewer private equity (PE) funds looking to make so-called "bolt-on" acquisitions in the sector. "I have talked to 12 PE firms that want to exit their investments, but there are no buyers. Private investors may have to change their expectations by holding onto their (oil and gas) investments longer and accepting lower returns." He said the PE business model is changing: "it's no longer a business where investments are held for three to five years, and then flipped to another firm or go public through an initial public offering."
"While valuations are under pressure now," Betz said, "markets are great at seizing opportunities. I expect some assets will soon have different owners with different expectations." These new investors will be "less concerned about quarter-to-quarter pressures" and more inclined to invest for longer durations. "This industry is phenomenal about reinventing itself as market conditions and operational realities change. I firmly believe it will emerge better and stronger" from the current crisis, Betz said.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
