Interview conducted with an oil and gas investment banking associate in the Global Energy and Power/Natural Resources Group of a major investment bank
This interview ended up being excessive so we have cut it into 3 components to avoid reader exhaustion
Do you specialize in a sub-sector of oil and gas? For example, exploration & production, midstream, or refining?
When you start out as a generalist oil & gas banker, you would be covering all subsectors along the oil and gas value chain. This will encompass upstream oil and gas production, integrated oil and gas companies (Supermajors such as Chevron, Exxon, RDS), large midstream companies (Kinder Morgan, Enterprise Product Partners), refiners (Valero, Phillips 66, Tesoro/Andeavor) and oilfield services (Schlumberger, Halliburton, Baker Hughes General Electric).
Once you move towards the associate level you will find yourself working more closely with particular Directors and MD’s who have specialized. I would say that as an analyst your expertise is an inch deep and a mile wide, whereas once you are an MD you become a mile deep and an inch wide.
So do you need to know everything about refineries before your interview?
I would say no – at least not refineries. They are relatively lightly covered versus E&P’s, integrated and midstreamers.
You should know what a crack spread is and how they fit in the broader energy picture, but no one expects you to know what the New York crack is and what CARBOB is trading at.
What do you need to know about oilfield services (OFS) before your interview?
Same for oilfield services (sometimes shortened to just services) – although for investment banks that specialize in services, including many boutiques, you DO need to know everything about them (and it is a very lucrative space and bonuses are very large). So if you are interviewing at Jefferies, make sure you have read extensively about the sub-industry. Naturally, banks with less balance sheet can compete in this advisory space so not as much emphasis for the Bulge Brackets.
Understand oilfield services dynamics – right now services are in the doldrums because the upstream producers are being disciplined with capital spending, which you would ascertain from what their management teams are telling you via their investor presentations and call transcripts. Instead of drilling more while the oil price is high, they are choosing to return capital via dividends and share repurchases. They are only producing when drilling a certain well meets an IRR threshold. As such, there is less demand for OFS and therefore there is no cost inflation or cost creep from the OFS.
Unfortunately, the market has not rewarded management and share prices are not doing well. This is a classic academic tradeoff between NPV versus IRR – now school will always teach you to go for the higher NPV, but in such a volatile space this is not that simple.
Oil producers may well decide to go for NPV instead of IRR – a jump in spending budgets will mean OFS’ will have more business. Also, important to know that drilling in unconventional shale plays has become far more capital intensive. The wells drilled are becoming deeper and longer – this means more money needs to be spend on pipe, pressure pumping and frac sand.
How are investment banking revenues in the oil and gas space right now?
Well, the Saudi Aramco IPO being scrapped aside, the space has been doing well in certain areas but remains slow in others.
M&A is hot right now with some major consolidations in the Permian basin with the recent BHP sale of the old Petrohawk assets to BP and Diamondback purchasing Energen.
There have been equity raises as well but everything feels a bit tempered versus a more gung-ho sentiment in 2014. Trading multiples – EV/EBITDA, Price/Cash Flow, P/NAV are low. Investors are still cautious having been burnt the last time around and energy is being seen more and more as an old world sector.
High yield is very active – after a scare after the oil bust and companies going under (yields for energy companies were well over 10%) demand for oil and gas credit has rocketed.
It is busy but it will get busier as investors start to develop comfort around energy again.
So where have investors gone as money is being drawn from energy funds? The sector is so beaten down, are investors coming back?
Because technology is on this perpetual secular bull market.
The [energy] sector is beaten down right now? It has historically been a large constituent in the S&P index, but now it seems to be overrun by “tech” or “information technology” – which I think is more due to nomenclature rather than what is just hot.
For example, Google and Facebook are considered technology but their primary sources of revenue are really media in nature, are they not – and are their sources of revenue not primarily from advertising? And this advertising is at the expense of historical advertisers which is news media and print. Today, you are seeing new cannibalization of online ad revenue by mobile ad revenue. There is technology involved but the business is fundamentally advertising.
What I actually consider technology is when they come to the oil and gas companies and say “you have the data, we know how to use the data” with big data analytics platforms and artificial intelligence. That’s technology.
The cloud is technology – and all the oil and gas companies are on the cloud for servers – but is that really technology or is that the new real estate? Because where we had physical file folders we now have digital file folders that are hosted externally.
Likewise, retail is dead – or has it just shifted to a different business model in e-commerce? I am not buying any less items, I am just buying from a different intermediary – in fact I am probably buying more from Amazon today than I did from retailers before because of convenience and a one-stop shop in addition to the removal of any purchasing frictions from hiring staff and renting real estate.
So I don’t see technology as an industry necessarily getting bigger – it is just misclassified and these FAANG behemoths are really just cross sector conglomerates that have displaced the incumbents.
An interesting observation is that I am hearing about Amazon displacing everything – healthcare, payments, financials – and “your margin is my opportunity” a la Jeff Bezos becoming extremely cliche but I can’t see big tech encroaching on big oil anytime soon because I just don’t see Alphabet or Microsoft starting drilling programs.
Anyways, once the market calms down and compares the multiples, they may well find that there is space in their portfolios for energy.
To be continued…