Distressed Investing Opportunities; Dangers In The North American Oil & Gas Sector

Distressed Investing Opportunities; Dangers In The North American Oil & Gas Sector

Kirkland & Ellis LLP presentation from Grant’s Conference titled, “Distressed Investing Opportunities; Dangers In The North American Oil & Gas Sector.”

Executive Summary

  • Since June 2014, the price of oil has decreased approximately
    50%, from a WTI price of over $100/bbl to $40-$50/bbl today.
  • As of April 3, 2015, the price of oil ranged between $49.14 (WTI) and $54.95 (Brent).
  • The current pricing environment presents serious challenges for North American exploration and production (“E&P”) companies, with additional ramifications in the oil field services sector and other related industry segments.
  • Most E&P companies are projected to be considerably overlevered in 2015.
  • Companies with debt maturities scheduled to ripen in 2016 may have difficulty refinancing their debt.
  • Tightened liquidity and capital expenditure reductions will cause further damage, as the shale-driven North American oil & gas industry cannot sustain earnings without continued drilling.
  • These distressed conditions present significant opportunities for investors to offer E&P companies creative solutions to address liquidity needs.

Oil & Gas Market Update

  • The downward trend in commodity pricing has been precipitated by a global supply/demand imbalance, which widened in 2014 and which some have predicted may persist for an extended period.
  • This trend was compounded by OPEC’s November 2014 decision not to implement a production decrease that would have moderated falling oil prices.
  • While some E&P companies have hedges in place to protect cash flows through the end of 2015, fewer have the same protection into 2016.

E&P Sector Background

  • The North American oil and gas industry recently has been driven by the shale boom.
  • A typical shale well has steep production declines of over 50% in the first year.
  • Earnings naturally decline unless E&P companies continue to drill new wells.
  • Therefore, the North American shale revolution requires constant injections of new capital in order to grow or even maintain revenue.

  • Most E&P companies are financed with a combination of common stock and debt. However, capital structures vary widely, depending upon the company’s maturity.
  • In the start-up stages, pure-play E&P companies often rely on equity raises as their primary financing method.
  • Historically, additional capital raises often have included the use of IPOs.

See full PDF below.

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