Fundamentals Hearten Energy Firms
By Mari Salazar and Jason Reimbold
COVID-19 has cast a pall over the global economy for two long years, but for professionals in the energy industry, the bright side finally seems to be just around the corner. Or maybe it is already here.
Some of us may be wary about jinxing things, but given the activity we seeing on the client side, it appears we have moved from the cautious optimism of 2021 to straightforward optimism in 2022. No longer do we tend to hear a company say it is holding its breath and jumping in. Nowadays the message is simpler: “We are jumping in.”
Market dynamics are helping shore up the industry’s increasingly positive sentiment. Following a 50% gain in crude oil prices during 2021, as demand increased while officials rolled back pandemic-related restrictions, many analysts now say they expect still higher moves in 2022. Similarly, many producers are increasing output gradually, even as others proceed cautiously out of concern about coronavirus variants.
Meanwhile, oil demand has exceeded expectations on a global scale. There is absolutely a growing demand for the commodity, and that is a fundamental driver of our business. It is a true recovery, inasmuch as it reflects the impact of the demand and is not merely about trading gains or irrational reactions to the day’s headlines.
Given the current conditions, energy financings are on the rise, although the landscape has changed considerably for the sellers and buyers of oil and gas assets and the financial institutions lending to market participants.
Tightening Focus, Conservative Tone
In 2021, it became apparent many companies were starting to refine their portfolios by selling noncore assets and adding complementary operations. On the transaction side, 2021 approached a return to pre-pandemic levels. From what we see today, we expect more of the same in 2022.
Much of the deal activity has been location-specific, with firms realizing they are better off building upon existing strengths, while far-flung operations may be worth more to someone else. For example, while one outfit sees value in expanding its footprint near the Canadian border in the Williston Basin, another is content to build out its presence in the Permian Basin.
Many small- and medium-sized companies are benefiting from multifaceted divestitures that historically have been too large and unwieldy for the market to absorb. For example, instead of an all-or-nothing deal for a collection of assets that spans multiple states, firms have the opportunity to acquire portions that best augment their existing asset profiles.
Many a company is looking to build up its business in one particular area, potentially positioning itself to eventually sell to a much larger company that seeks to expand in a region or is in search of a good entry point.
The rise in transactions is not a speculative push fueled by the oil price rally. Instead, many buyers aim to make smart purchases in assets that are actually producing–not merely promising. We see many legacy oil and gas operators who have been reluctant to participate during frothier times, but as valuations shift more heavily toward cash flows instead of upside potential, these operators have moved back into the market.
Buyers generally fall into one of two camps: companies that are backed by well-known equity firms and scrappy industry players who have endured the recent years’ challenges while reducing debt and improving their balance sheets.
It seems likely we will continue to see companies take a conservative approach and go about new development in a thoughtful way. That means a manageable measure of debt as part of capital structure, an emphasis on working out of cash flow and continually looking for opportunities within their portfolios, whether that means financing growth through divestitures or enhancing their core property sets.
Stretched Financing Environment
Despite the robust dealmaking landscape, financing has grown increasingly challenging, as many lenders and investment banks have stepped away from the industry during the last two years. While some have adopted a philosophical shift that includes a move away from fossil fuels, others simply cannot tolerate the industry’s inherent volatility.
Although oil and natural gas is a cyclical business, lenders with the right experience and expertise remain highly comfortable with the sector.
As for potential opportunities, the emergence of renewable energy has lured some energy investors away from oil and gas and further constrains the sector’s access to capital. However, some oil and gas companies indicate they eventually may add renewable projects to their portfolios.
Ultimately, savvy energy lenders are here to support clients and help them in any profitable venture they pursue. That is how we look at any business, whether it is in oil and gas or renewables.
Editor’s note: A version of this article originally appeared on the BOK Financial website, “The Statement.”
MARI SALAZAR is senior vice president and regional manager of energy financial services for BOK Financial. In 2013, she was selected by the “Houston Business Journal” as one of the top 100 most influential Houston business leaders in the energy industry. She was also recognized as a 2017 “Outstanding Women in Banking & Finance” recipient by the Women’s Resource of Greater Houston and by “Oil & Gas Investor” magazine’s 2020 “25 Influential Women in Energy.” Salazar has a B.B.A and a B.S. in economics and a M.S. in business and finance from the University of St. Thomas.
JASON REIMBOLD is managing director of energy investment banking for BOK Financial Securities, where he is responsible for leading the energy investment banking group while originating and executing client mandates including acquisitions, divestments, raising capital and facilitating joint ventures. He has worked in energy finance since 2005 and currently offices in Dallas. He earned a BSBA in finance from the University of Tulsa and served in the U.S. Army and U.S. Army Cavalry.