Borrowing Cash to Fuel Growth Alone Is Over
Focus on returns, ESG essential to lure investors back to oil and gas.
It is no secret that investors have all but abandoned the oil and gas market over the past few years looking for more solid returns and performance out of their financial commitments. Years of borrowing in the name of growth and sacrificing the bottom line to do it has caught up to oil and gas producers, which are now having to shift their business models to live within cash flow.
While some on the financial side believe it is doable, and the money will come back, most are citing headwinds that will keep dollars out, at least for the foreseeable future. In some cases, even questioning the useful life of hydrocarbons as the earth’s dominant fuel.
“The sentiment is very poor,” Simmons Energy Managing Director Damon Box told attendees at Oil and Gas Investor’s recent A&D Strategies and Opportunities Conference in Dallas. “There are a lot of headwinds facing us as far as public investors go. One is the underperformance, 38% down since 2014. That in and of itself is a challenge, but it is made all the worse by the fact that the S&P 500 and other market indexes have performed well over this period.
“Investor sentiment was against the growth business model,” he continued. “ESG (Environmental, Social and Governance) has become a big issue with investors. There is a growing belief among institutional investors that this is a short-term business. Looking at 15 years, 20 years out and that hydrocarbons are in the process of going away. If you believe that it is hard to make the case for investments today. That’s a challenge that is relatively new in my mind and has become more serious amongst investors.”
The climate in the oil and gas business today isn’t an inviting one for public investors, who are looking across the broadest spectrum of business to seek the most attractive destination for their money. Whereas energy traditionally had been in the mix, the new mantra and focus on returns has bolstered the competition—technology, medical, industrial and so on.
“There is very little incentive right now to jump in,” confirmed Juan Diego Vargas, director of First Reserve. “If you’re a money manager, why be the contrarian? We’re going to have to see some performance on the public markets and continue to see some exits on the private side. Once you see that turn, then I think you will start seeing some capital flow back. It is definitely a challenging environment right now.”
Although the current market for funds is tough, there are groups with cash to invest in the right projects, though some are targeting smaller, non-operated interest opportunities rather than the bigger, company-wide deals at this point.
“We’ve completed over 150 transactions, a lot of singles and doubles,” said Stuart Rexrode, managing partner of Blue Rock Energy Partners. “We are here. We have capital and we want to put it to work.”
The new investor sentiment is going to force change on those in the energy business looking for financial backing. All players will need to answer for the chronic underperformance of the sector.
“A lot of these managers are getting asked ESG questions and they are also dealing with the fact that natural resource investments both private and public have underperformed,” said Preston Powell, managing director of Carnelian Energy Capital. “We are excited about this market. We need to be patient and wait for the right opportunity to buy. I don’t think we’re there yet. We think this will be an interesting buying opportunity in the next 24 months.”