Smart Money: How Engineers Are Transforming Traditional M&A
We live in an era where the energy industry has valiantly weathered the downturn associated with the oil price collapse of 2014, largely avoiding a wave of mergers and acquisitions (M&A) and restructuring despite a global crude slump. But with the oil price forward strip continuing to suggest tough times ahead, the inevitable wave of M&A that pundits have been predicting will undoubtedly manifest itself at some point.
Banks will be busy, and if you have ever been interested in a career in investment banking, now may be the time to test the waters.
Forecasting the Inevitable
Exploration and production (E&P) companies have enjoyed unparalleled access to capital this year. In the first half of this year, the energy capital markets have seen 27 and 34 disclosed debt and equity offerings across the E&P sector raising USD 15 and USD 13 billion in total proceeds, respectively. That, in combination with lower operating expenses (thanks in large part to service costs that are down to razor-thin margins) and concerted efforts to upgrade portfolios have allowed companies to continue funding operations in this difficult environment.
But as the industry braces itself for the potential of further downside risk in the second half of 2015, some companies will be faced with the last-ditch effort of restructuring via bankruptcy. Much like in nature, the strong companies will be on the prowl for opportunistic deals to gobble up weak competitors.
The feeding frenzy could be epic, with more than USD 35 billion in available “dry powder” dedicated to energy investments (up to USD 100 billion including leverage), ready to pounce on any weakness. That weakness may be exacerbated by reduced borrowing bases as, unlike the fall in oil prices 6 years ago, commercial banks are likely to respond differently this time around given increased regulatory scrutiny and the fact that energy is the only “problem child” in their portfolios. Having added more than USD 260 billion of debt over the last 3 years, oil and gas companies will experience substantial pressure related to their credit facilities should depressed commodity prices persist. Not all will survive.
The Role of an Investment Bank
Much like the realtor who helps you sell your home, the role of an investment banker is to put your asset out there in the best light possible and clearly articulate its ultimate potential. That is where banks differentiate themselves and, as shale plays mature, engineering analysis is becoming indispensable to balance aggressive sales stories with technically sound work.
The most useful banking engineers do not necessarily create economic models, but instead provide qualified and informed guidance that generates the inputs for such models. From large-scale data analysis for type curve derivation to well spacing assumptions (think original oil in place estimates and recovery factors), optimal completion designs, and even ideas on driving down costs and debottlenecking infrastructure, a competent engineer can be a competitive advantage for a bank (as the author of the Discover a Career section explains).
Some progressive banks, like Jefferies, were quick to appreciate the advantages of having in-house technical staff, but virtually every bank has now picked up on this benefit (HR Discussion has a great historical account of this trend). As the sector once again foreshadows a renewed need for technical analysis in the current climate, an insatiable demand for talented engineers has resulted.
Flight to Quality
The increased demand, in contrast with the modest prospects at traditional E&P employers that are facing the sobering likelihood of layoffs, means that talented engineers may flee to banking. The combination of a prosperous professional outlook with the notoriously high compensations at investment banks is resulting in a gold rush for engineering at banks.
From introductory dialogue to advanced discussions in economic theory and strategy, this issue addresses all the topics I have discussed and more. The caliber of the technical analysis is matched by the nontechnical content in sections such as Technical Leaders, which includes advice from seasoned M&A veterans.
This comprehensive coverage makes it all the more rewarding and satisfying to end my time leading TWA and hand over the reins to the next editor-in-chief, Jarrett Dragani. Over the last year, we have managed to increase the number of TWA editors while at the same time upgrade the TWA Editorial Board, the result of which is an extraordinary roster of SPE young professionals from every corner of the world with a collective objective to deliver world-class content. With Jarrett’s enthusiasm to challenge the status quo for the better and an ambition to deliver superior work product, I am confident that he will lead our beloved magazine to new heights in 2016.
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23 January 2020
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