What's the big picture at the 2021 Energy Capital Conference?
The oil and gas industry has suffered through a drought of capital starvation over the past couple of years not seen since the 1980s. Even before the COVID downturn in 2020, capital providers in both the public and private arenas were yanking back investment funds in retaliation to the industry’s history of capital destruction during the shale boom spendthrift days. Combine that with a global mantra to transition energy supplies away from fossil fuels, and financiers that historically backed oil and gas development were motivated to walk away.
The result was that the capital markets closed to oil and gas issuers, private equity firms were unable to raise as much or any new funds, and reserve-based loan providers were cut in half and those that were left tightened the terms to be almost unmanageable. In lieu of no capital sources, E&Ps were forced to change from growth models to returns driven and to live within cash flows. A&D buyers disappeared.
But greenshoots are evident. Commodities have recovered from lows. Capital markets are open for some. Private equity is adapting with new investment models. The death of the oil and gas sector was greatly exaggerated, and opportunistic capital is staking out positions for a recovery. But one thing is for certain: a radical transformation is taking shape in the way oil and gas companies source capital.
Wall Street and the Independent E&P – Some very big investment funds have exited the sector under pressure to divest of fossil fuel assets, but many more are on the sidelines simply because the sector’s returns were abysmal over past years compared to other opportunities. Will Wall Street back oil and gas again once the companies learn to deliver upsized returns on investment? Is that already evident in the high yield market that has been on fire since the beginning of the year? And do small and mid-cap companies have any hope of attracting public capital?
Private Equity Pivots – Private equity firms in the oil and gas space are picking up the last pieces of old-model portfolios and transitioning to new ideas. In the near term, those are investments in longer-term producing assets and drillco-type structures. But some are imagining a time in the future when larger public companies will need inventory once again, and are buying now when prices are right. And in an emissions focused environment, could gas assets begin to trump oil?
Commercial Banks Vs. New Lenders – The tried-and-true borrowing base is not working for commercial oil and gas lenders and many are pulling out of syndications with few willing lenders to step in, leaving operators worried about their RBL. To the rescue: private capital is stepping in to fill the gaps for asset-backed debt and essentially becoming the new banks for producers.
A&D Revival – While the wave of distressed assets might be subsiding, large independents with slower development plans are expected to cast off noncore assets now that commodity prices have stabilized. The only question is who are the buyers that are financially positioned to take advantage of the bounty, and how will the deal terms be structured?
Family Office Fundings – Often out of the spotlight and quietly undisclosed, these family funds are an important part of the capital stack for upstream, midstream and oilfield service companies as they take positions during the low point in the market.
Green Capital Gush – Capital is flowing in torrents into energy transition startup companies, and traditional oil and gas capital sources are launching their own funds to grab the green. Who’s doing it and what are the returns on investment they are hoping to capture? Is this robbing the oil and gas sector of available funds to invest?
Check out our agenda and speakers from 2020 for an idea of what to expect.