Steady oil prices should attract more asset sales

By Paul Puri, Managing Director and Chief Development Officer
and Bryan Livingston, Managing Director and CEO

West Texas Intermediate crude has been trading in the high $40s, inching toward $50, for about a month now.

If this price is sustained, Capital Alliance Corp. (cadallas.com) is cautiously optimistic that oil & gas asset sales will gradually begin to ramp-up.

Several asset sales, in fact, were just recently announced:

In related news, several new entities are forming to acquire oil & gas assets, an indication that investors expect more opportunities for asset sales to present themselves at the $50 price point. An example is Delaware Basin JV, Jetta Permian LP. Blackstone Energy Partners and an affiliate of Jetta Operating Co. Inc. have committed $1 billion to the fund, which will acquire assets in the Delaware Basin.

If WTI maintains a stable price at or near $50, North American production out fields such as the Permian Basin are likely to increase as it’s been shown that producers can make money at this price point.

While that is good news, things aren’t looking so good to our north. The Canadian Association of Oilwell Drilling Contractors just slashed its forecast for 2016, saying it will be the worst year for drilling there since 1977. This news certainly highlights the challenges that persist in the industry.

Financing oil & gas deals remains a challenge

One of those challenges is the lack of bank financing, which could hamper some deals. To be sure, there are risks to banks that lend to upstream oil & gas exploration and production companies. History tells us that commodity prices can be highly volatile, and that means upstream borrower profitability and liquidity could quickly fluctuate. Global events are out of the control of a bank’s operations yet they can have a dramatic effect on the price of oil and subsequently on borrowers’ ability to repay.

The Office of the Comptroller of the Currency in March issued a revised handbook for examination of oil & gas exploration and production lending with updated guidance to bank examiners on the risks of lending to upstream companies.

Since the price of oil dropped in 2014, the OCC has had continuing dialogs with banks that lend in the oil & gas sector. This has had the effect of tamping down lending in the sector, making it difficult for legitimate transactions to receive financing.

The reluctance to lend could certainly cause some negative impacts as interest in asset sales and mergers and acquisitions begin to tick upward. Companies that seek traditional bank financing may find it hard to come by and may have to solicit alternative financing.

Conclusions

Despite some headwinds, we still feel cautiously optimistic that we’ll see renewed activity in the oil & gas sector during the final quarter of 2016, including an uptick in asset sales.

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy.

 

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