It's been a long two years since COVID-19 started casting a pall over the global economy, but for professionals in the energy industry, the bright side finally seems to be just around the corner.
If it's not already here.
"I'm still a bit superstitious, so I don't want to jinx us, but given the activity we're seeing on the client side, I believe we've moved from the cautious optimism of 2021 to just optimism for 2022," said Mari Salazar, senior vice president for the energy financial service group at BOK Financial®. "It's no longer 'we're holding our breath and jumping in,' but 'we're jumping in.'"
Market dynamics are helping shore up the industry's increasingly positive sentiment. Following a 50% gain in the price of oil in 2021, as demand increased while officials rolled back pandemic-related restrictions, analysts expect still higher moves in 2022. Many producers are gradually increasing output—while some are proceeding cautiously over concern around coronavirus variants.
Meanwhile, oil demand has exceeded expectations on a global scale.
"There is absolutely a growing demand for the commodity, and that's a fundamental driver of our business," said Jason Reimbold, managing director of energy investment banking at BOK Financial Securities, Inc. (BOKFS). "It's a true recovery in that it reflects the impact of the demand, and it's not just about trading gains or reacting to an irrational headline."
Given the current conditions, energy financings are on the rise, although Salazar and Reimbold said the landscape has changed considerably for the sellers and buyers of oil and gas assets and the financial institutions lending to market participants.
Firms tightening their focus
In 2021, Reimbold said companies started refining their portfolios by selling non-core assets and adding complementary operations.
"On the transaction side, we approached a return to pre-pandemic levels in 2021," he said. "And from what we are seeing today, we are expecting more of the same in 2022."
Salazar said 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 another energy company. 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 in West Texas.
She added that many small- and medium-sized companies are benefiting from multifaceted divestitures that have historically 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 a portion that best augments their existing asset profile.
"For many of the companies we work with, they're looking to build up their business in one particular area, potentially positioning to sell to a much larger company down the road that's looking to expand in a region or wants a good entry point," Salazar said.
Conservative tone prevails
Salazar and Reimbold assert that the rise in transactions is not a speculative push fueled by the rally in oil prices. Instead, many of the buyers are looking to make smart purchases in assets that are actually producing—not just promising.
"We're seeing many legacy oil and gas operators who were reluctant to participate during frothier times, but now as valuations have shifted more heavily toward cash flows instead of upside potential, they've moved back into the market," Reimbold said.
Salazar added that buyers generally fall into one of two camps: companies that are backed by well-known equity players and scrappy industry players who endured the 2018-20 challenges while reducing their debt and cleaning up their balance sheets.
"I think we'll continue to see companies take a conservative approach and go about new development in a thoughtful way," Reimbold said. "That means a manageable measure of debt as part of their 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 set."
Financing environment stretched
Despite the robust landscape for deal-making, financing has grown increasingly challenging as many lenders and investment banks stepped away from the industry over the last two years. While some adopted a philosophical shift that included a move away from fossil fuels, others simply couldn't tolerate the inherent volatility of the industry.
"It's a cyclical business," Reimbold said. "However, the experience and expertise at BOK Financial provide for a high level of comfort with this sector."
As for new potential opportunities, Salazar said that the emergence of renewable energy has lured some energy investors away from oil and gas, which has added to the sector's capital constraints. However, Reimbold said that a number of oil and gas companies have indicated that they may eventually add renewable projects to their portfolios.
"Ultimately, we're here to support our clients and help them in any venture they pursue that is profitable," Salazar said. "That's how we look at any business, whether it's in oil and gas or renewables."