HOUSTON—In the dark of the oil and gas industry’s down cycle, funding new projects and acquisitions will be slower and more rigorous.
But the money will get into the hands of smart management teams and solid deals, speakers said at the Independent Petroleum Association of America’s Private Capital Conference on Jan. 29.
Michael McMahon, managing director, Pine Brook Road Partners LLC, said the reasons for an investment and whether it is private or public are all secondary to one question: Do you have good rocks?
“Forget about balance sheet. It’s easy to fix the balance sheet, but what do you have when you’re done? A crappy company with a better balance sheet,” he said.
Pine Brook is looking for A&D teams that can get exposed to a project where the rocks are well known and the value is going to be executed on.
Even distressed companies will give little ground to buyers in the first half of the year.
“How do you get deals done? Part of that is you’re patient,” he said. “At the present time, there is a big gap between the expectations of buyers, sellers and partners.”
In the first half of the year, E&Ps will see heavy use of credit lines. For new capital, terms will narrow and maturities will shorten, said Christina Kitchens, executive vice president and group director, CTB Energy Finance. Fees and rates are increasing in the near term.
Paul Beck, executive director, Macquarie Bank Ltd., said six months ago lenders were happy to lend and give value to undeveloped acreage.
“I think that’s going to be more difficult going forward,” he said.
Most unconventional drilling is going to be difficult to do in a $45 price environment, Beck said.
“I think you’ll see lenders on the project side fund a little bit slower,” he said. “There’s no room for error at these oil prices.”
Hedging will be essential. “You won’t see capital going into long-term management teams,” he said.
Capital competition will persist.
McMahon said capital will still find the great teams.
“How many really first-rate CEOs are out there and how do you identify them and how do you work with them as a financial partner? That is the key in any environment to being successful,” he said.
Kitchens said people are nevertheless concerned about capital being taken out of the energy market.
“We’re not seeing that and we’re not anticipating that,” she said.
Kitchens said downgrading of companies and credit facilities is likely to occur toward the middle of the year. WTI prices should flatten by the fourth quarter of 2015 but M&A activity will begin to accelerate by the third quarter of 2015.
“Most people are preparing for that,” she said. “There will be consolidation, joint ventures and drilling programs” similar to the downturn in 2008.
Private-equity backed debt deal will be favored by institutions with a focus on liquidity, with cash favored for deals.
Still, some lenders will have “tucked-in tails,” Kitchens said. “A number of those banks that were particularly aggressive in this last year, many of them are taking a breather from the marketplace and finding out what they’re doing.”
Firms such as Pine Brook want to form alternative partnerships, not scavenge assets. The firm has more than $1.4 billion of dry powder and investors supportive of new opportunities.
“We’re not a vulture fund. We’re not a distressed debt buyer,” he said. “Companies that have good assets are not really under distress. They’re not going to give up those assets.”
McMahon said he wants to partner with companies to move forward.
“I think that takes a little imagination. It takes a little negotiating skill where you’re fair with people,” he said. “Our business approach is we’re business builders, not buyers of assets.”
McMahon said the market has misunderstood how disciplined E&P and oilfield service companies are prepared to be.
All of Pine Brook’s companies have throttled back on drilling in anticipation that service costs would fall.
In the Eagle Ford, “we’ve seen our well costs go from $5.8 million to $4.9 million. We think they’ll come down a little more,” he said.
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