Some of the largest companies in the world are companies in varying parts of the oil and gas value chain. During the last 10 years, oil majors such as ExxonMobil, Chevron, BP, Petrochina and Sinopec had some of the largest market capitalizations in the world (Exxon ranking #1).
From a revenue-only perspective, physical oil traders such as Vitol, Mercuria, Trafigura and Glencore are global leaders when oil prices are sufficiently high. The recent oil price correction has muted valuations for energy companies and they have been overtaken by the technology giants (Apple, Google, Microsoft, Amazon), but energy remains a significant percentage of the total equity float outstanding.
Accordingly, energy is a very large team across all major, full service investment banks, with oil and gas corporate finance activities being front and centre of the business news when a major transaction is announced. A recent example is the Saudi Aramco IPO, which will be the largest IPO of all time. Global energy teams will be based in London, Houston, Singapore, Geneva, Calgary, Dubai, Shanghai, New York, and Sao Paolo.
Large oil and gas mergers and acquisitions are regular newsmakers, with the most recent megamerger being Shell and BG Group. Major merger & acquisitions activity in Canada as of late include Canadian Natural – Shell (Athabasca Oil Sands), Enbridge – Spectra Energy (merger), TransCanada – Columbia (merger), Cenovus – Conoco (asset acquisition), Suncor – Canadian Oil Sands (merger), Suncor – Fort Hills (purchases of Teck and Total’s working interest).
To fund acquisitions or bolster balance sheets, large oil and gas companies will tap into equity capital markets with secondary offerings. Sometimes, they will issue equity to fund new projects as well if internal cash flow is insufficient. Junior and intermediate names are much more likely to issue for this purpose.
Aside from the Saudi Aramco IPO, activity has been robust in primary markets. Prominent Canadian examples include Seven Generations and MEG Energy. As per any other industry, this heavy ECM business requires that banks have well staffed equity research across energy infrastructure, exploration and production (E&P) for junior, intermediate, and senior names, integrated oil, refining & marketing and oilfield services.
Oil and gas companies are also regular debt issuers, with major oil and gas companies having ample US$ denominated debt in their capital structures (to match interest with US$ based revenue as oil is a globally traded commodity). Junior and intermediate names have been able to tap into US high yield debt, as debt investor appetite flows back into shale projects.
All major oil and gas companies are major corporate banking clients, as credit support is a prerequisite for participating in non-advisory work (ECM/DCM). Corporate banks will give oil and gas companies ample revolver space (the supermajors having some of the largest revolver commitments around into multiple billions of US$), while commercial banks will extend reserve-based lending facilities to junior and intermediate energy companies.
There is also a lot of sales and trading business with energy companies due to the volatile nature of 1) the price of oil and 2) the USDCAD exchange rate. Oil and gas companies need to hedge these risks to ensure that projects meet internal shareholder hurdles. Should hedges work in their favor, oil and gas companies may want to unwind these hedges, which means more profit for the counterparty bank.
Energy and Oil & Gas Investment Banking in Canada
In Canada, oil and gas companies are the largest constituents in the TSX index after the big banks, with Suncor, Cenovus, EnCana, Canadian Natural Resources, Imperial Oil and Husky Energy routinely involved in some of the largest corporate finance transactions.
These companies (and State Owned Companies who are looking to purchase Canadian assets) are some of the most important clients for Canadian investment banks, with full coverage teams based out of Calgary (as well as localized sales & trading support with a large commodities focus for natural gas, various grades of crude oil for both physical and cash settlement, and power/electricity).
Large corporates will be clients of Bulge Bracket investment banks as well as the Big 5, with Goldman Sachs, JP Morgan, Morgan Stanley, Barclays, Citi, Credit Suisse, UBS and Merrill Lynch all having a presence in Calgary. JP Morgan has been the busiest amongst the globals in terms of deal flow as of late, but at of the banks have been winning major mandates.
All Big 5 Canadian Banks, National Bank Financial, Macquarie, Peters & Co and GMP FirstEnergy provide advisory services, regularly winning big mandates (especially with junior to intermediate level names). The Big 5 Banks will also have separate acquisition and divestiture (A&D) teams that focus on asset level sales and purchases. This corporate finance activity is more technical and deeply specialized and teams will hire heavily from petroleum engineering talent pools.
Energy and Oil & Gas Investment Banking Interview
As energy is a very niche industry, in addition to the standard investment banking interview questions candidates will be expected to know how to answer the following questions:
How do you value an oil and gas company?
Walk me through a NAV model.
How do you value an exploration and production company?
What are valuation metrics that are relevant for a senior producer but not a junior producer?
What multiples do midstream companies trade on?
Where do you see the price of oil in 6 months? A year?
Where do you see the price of gas in a year?
What is a boe?
What is WCS?
What is WTI? Where is WTI trading at?
What are some ways to extract oil in the oil sands?
How do you extract shale or tight oil?
What energy company would you buy?
Walk us through a recent oil and gas merger.
What are some major oil and gas companies?
Should you hedge USD debt as a Canadian energy company?
Answers to all of these questions can be found in our energy section.
Spreading Oil & Gas Comps
When spreading comparables for oil and gas producers, investment bankers will look at:
- Production (number of barrels of oil equivalent per day)
- Geography (Does it operate in Canada? The Permian Basin? Is it international?)
- Oil/Liquids -to Gas Mix
- Light or Heavy Crude
- Dividend Yield or Growth
- Reserves (1P/2P)