Low oil prices chill deal-making, capital raising

  • Door slams shut in equity capital markets
  • Hard to predict floor in current drop
  • Lower cost of production remains key

Global production is currently running about 1.3 million barrels per day greater than demand, David Miller, managing partner of EnCap Investments LP, said at the Buyouts Texas conference Dec 3. With oil dropping to below $70 a barrel, oil fields where economics work at $60 a barrel remain in demand.

But overall, lower prices and higher supply have caused the “door to slam shut” in equity capital markets for energy ventures. Lower oil prices have also cut down the value of reserves in oil and gas fields, causing sponsors to re-evaluate the value of target companies.

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The price for a barrel of U.S. crude hit $66.81 on Dec 4, down from more than $90 just a couple of months ago, according to the New York Mercantile Exchange. The price drop was precipiated by Saudi Arabia announcing “deep discounts for the crude it sells Asian and US buyers in an apparent attempt to defend market share,” Reuters reported.

“No one knows where the floor is,” Miller said. He added that he expects reduced activity in EnCap’s portfolio of about 45 upstream firms now drilling wells. About 90 percent of EnCap’s portfolio companies are viable at $75 a barrel, but that percentage declines to 70 percent of its portfolio at $65 a barrel, he said.

“The greater damage is in the value of assets,” Miller said. “Now is not the time to sell upstream assets. Every (purchase) deal is in the process of being renegotiated.”

Pentti Karkkainen, co-founder and senior strategy advisor at Kern Partners Ltd, said energy producers need to keep costs as low as possible.

“This is an environment where you don’t want to be exiting, but if you can deploy capital and make a return, you want to do that,” Karkkainen said. “This has happened before… Let costs come down, get back to basics and work your way through the environment. It’ll pass.”

Marc Rowland, senior managing director at IOG Capital LP, said the firm’s financing products for energy development are “more in demand” now that other capital opportunities have grown more scarce.