My Meeting With Oil’s Biggest Dealmakers
LONDON – I am writing this on an airplane flying back from London, scene of my latest meeting on global oil credit. There is a conclusion I will draw in a minute that will impact how you approach oil company shares.
First, I thought you might like to be the proverbial “fly on the wall” in this meeting. So let me sketch what took place…
Most of the usual suspects are present – bankers, investment fund managers, financing entities, ratings agencies and their advisors. This is the seventh time I have been here in the past nine months. Each time has been for oil matters… and each time I have marveled at how much has changed so quickly in this market.
London is the city one now goes to raise oil project financing. As I remarked in January, there are now more oil funds raised within a three-mile radius of London’s Liverpool Street train station than anywhere else on earth. This is The City, London’s financial district, where my meetings normally take place.
But not this time…
Earlier today, we met in the swanky Borough High Street, Southwalk offices of a high-powered private investment group, close to London Bridge. The venue is a compromise, somewhere between a bank conference room high above the city and a finance firm solicitor’s stately Bunhill Row offices.
And that symbolically speaks as much about the rapid change in how things are playing out than anything…
The Consensus Is Unnerving
Five months ago, I talked about the transformation taking place in oil finance – the move from syndicated bank loans (symbolized by the city of Frankfurt) to the new reliance upon initial placement offers (IPOs) and private placements (becoming the hallmark for raising funds in London).
Well, nothing remains static very long in this business.
The IPO market for oil ventures has been simply dreadful of late, while the funding advanced in private placements has been exorbitant.
Let me give you a specific example.
Six weeks ago, I advised a client in a meeting also taking place in London. The company is a successful mid-range oil producer in Africa and the funding source has financed, and profited nicely from, two previous fields brought in by my client. This time, however, the best they could offer was LIBOR (London Interbank Offered Rate) plus 1,175 basis points (11.75%). That translates into a financing charge, for a supposedly preferred customer, of well over 15% a year.
I told the client we were leaving. Tony Soprano could have done better!
This is hardly an isolated occurrence. And that has returned interest to the securing of credit lines from cross-border banks. Yet the very physical location of our meeting in the shadow of London Bridge – symbolically halfway between entities representing the two contending approaches – indicates that this matter is hardly settled.
The agenda is also an indication that matters remain unresolved.
This is not a club meeting. There are no minutes to read, no resolutions to adopt, no procedural rules to observe. The shakers sitting around the large oval table simply get to it. Some have flown great distances to be at a meeting not likely to last more than two hours.
The issues may remain contested, but the consensus is unnerving.
These individuals probably represent, directly or indirectly, the bulk of front-line oil funding and they act like they know it.
Three matters emerge as having overwhelming support:
- Funding continues to suffer from a constriction in credit. Some of this is imposed by new conservative standards applied by both banks and investment groups. Yet most of this is the lethargic remains of a punishing global financial crunch. Nobody here sees it getting better any time soon.
- There is unanimous and early agreement that the primary new crude supply expected to come on line would be sourced from deepwater projects worldwide. These are the most expensive, but in all likelihood, as much as 75% of the large undiscovered fields left are located out there. Time was devoted to unconventional production (oil sands, heavy oil, bitumen, oil shale), with projects ticked off in rapid succession. But we spent most of the meeting talking about what is 400 meters or more below the sea surface.
- Supply side concerns are increasing. Not for tomorrow or next week or six months from now. But certainly, according to those assembled, by mid decade. It all depends on how fast (not whether) demand returns to the market. The only disagreement on this issue is when the prices will accelerate up. When, not if.
Meetings like this one do not end up in neatly packaged secret agreements. They are held primarily to determine if everybody is on the same page, seeing the market in the same way.
They are and they do.
Then, it is over. We are in a car being driven back to the Jet Centre at London City Airport, the new preferred landing location for private corporate aircraft. It is much closer than Heathrow and caters to those with the kind of ride my client has (a Gulfstream IV).
The flight back has given me much time to think. Here’s your takeaway from tagging along on this trip…
Companies will face significant financing problems moving forward. Those whose operations are dependent upon collateralizing oil in the ground to fund extraction will need to consider carefully the prospects for each field and the higher costs needed to fund each project.
Meanwhile, the big boys will have at least a temporary luxury of being able to wait out the smaller competition. No matter how one looks at it, larger or better-financed companies will increase reserves and project opportunities by a new round of energetic mergers and acquisitions.
The individual investor also has an interest in all of this…
Because identifying companies having good returns and likely to be absorbed will also make for a nice pop in the share value when the acquisition is announced.
The M&A drive was probably the biggest elephant sitting in the meeting room but never acknowledged. Those attending were not oil companies. They were money guys. And it may well be in the interest of many of them to keep credit restricted and field access costs high. They are actually on the prowl for attractive assets at attractive prices.
Guess what? So are we. Don’t be surprised if I let you in on some of these as they develop.