Oil Industry Operators Seeking Novel Capital Solutions

Oil Industry Operators Seeking Novel Capital Solutions

With the U.S. expected to break historic monthly oil production records in 2018, pumping a predicted average of 10.3 million barrels per day (mb/d), operators are seeking rapidly accessible capital on unusually short time frames.

Financial sectors are adapting to meet the new challenges of today’s product-on-demand industry. Many of these challenges were addressed during Thursday’s 2018 Independent Petroleum Association of America Private Capital Conference in Houston, where panels of industry veterans offered their views on current industry trends and discussed potential solutions to current customer needs.

Investors Seeking Companies with Capital Solutions

Brian N. Thomas, managing director with Prudential Capital Group, explained that in the 2018 market, institutional investors like Prudential “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.”

As of September 30, 2017, Prudential Capital Group manages around $82 billion in private placements and buys up to $12 billion per year in predominantly senior and subordinated debt and equity.

Thomas explained that Prudential Capital Group owes part of its success during the downturn to finding areas where they could add value as a “relationship-based institutional investor.”

Smaller Companies Tailor Solutions Per Customer

Smaller companies represented at IPAA PCC 2018 are creating their own niche by resisting growth, allowing them to customize their approach to each individual customer while avoiding harsh competition.

Houston-based investment firm, Chambers Energy Capital, focuses on opportunistic energy industry credit investments. Launched in 2009, the company’s 13 employees currently manage around $1 billion, $500 million invested across several 2017 transactions.

“We don’t have a cookie cutter,” said Phil Z. Pace, partner with Chambers Energy Capital. “Every asset and every team are looking for a slightly different solution. We generally try to stay small and not compete with the high-yield market.”

Renewed Enthusiasm Among Banks

Perhaps most surprising is the renewed interest of banks. Banks remained mostly out of the picture and inaccessible through the downturn. Yet, the upswing in crude prices across the past few months has pulled banks’ interest in oil back up.

“I’d say there’s a tremendous renewed appetite among the banks,” said Kevin Scotto, Managing Director of Leveraged Finance with Wells Fargo Securities. “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,” Scotto said.

“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,” Scotto added. “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.”

E&P Companies Consider Going Public

Following in the footsteps of the service sector, analysts are predicting we will see more exploration and production IPOs this year. Both the service and E&P sectors held off on IPOs during the downturn, some planning to go public in late 2016 or 2017 but holding back in the low price environment. Service companies are now pulling the trigger, with at least four filing IPOs in January 2018 alone. E&P’s may be next.

"The market is already feeling better than it did six weeks ago," said Timothy E. Perry, Managing Director with Credit Suisse. "We're starting to see these services deals come out, and we would expect if this continues there could be several E&P companies coming out to IPO. So as a result, we may have a much more vigorous IPO market than we've had before.”

Producers Prioritize Cash Flow Over Drill Site Inventory

While IPO market activity is on the rise, mergers and acquisitions may settle out in 2018. Today’s producers are taking this window of opportunity to create cash flow. Acquiring drill sites may sit on the back burner for a while.

"Instead what they do is take these locations, hundreds and thousands in certain cases, and develop them most efficiently," Perry told Upstream. "As a result, there's not the same land grab as there was a year ago, two years ago, five years ago, et cetera."

With the reality of the new price environment setting in, private capital markets are seeking novel growth opportunities, many coming up with creative alternatives to deploy new capital. In 2018, operators must find the available capital, examine the evolving trends affecting both capital seekers and providers, consider the changes in today’s global supply and demand dynamics, and decide how to approach different providers with their specific needs.

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Attorney Jimmy Vallee is an energy Mergers & Acquisitions lawyer, oil and gas industry commentator, and frequent resource for media outlets including USA Today, U.S. News & World Report, Oil & Gas Monitor and others. His new book, Giant Shifts: Energy Trends Reshaping America’s Future, released in May, 2017 hit #1 in two Amazon categories the week of its launch.
Connect with Jimmy at [hidden email]
Noted Energy Futurist” – Mensa AG 2016


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