Where the Big Global Oil Players are Putting Their Money Now
Marina and I are headed back to sunny Florida. It will be a welcome change from the brisk weather in London.
Not that I had much time to take in the scenery…
While my better half sampled the shops in Kensington High Street, I was in high level meetings in a place known as “The City.”
More oil and gas deals are funded in this small section of London’s financial district than anywhere else in the world.
Much of the conversation centered on OPEC’s latest moves, the fall in oil prices, and the massive short positions in oil futures that have combined to create the biggest pressures on the energy sector in a decade.
And that, in turn, has prompted some interesting moves among the major global money players…
Low Oil Prices: Setting the Stage for the Next Big Move
These are the folks who will decide what the energy market looks like over the next 12 to 18 months. They are also the reason I’ve been sitting in an 18th floor conference room overlooking what remains of the “The Wall.”
It was built by the Romans to protect Londinium, the empire’s port and bastion. For over 1,500 years, “The Wall” limited the city’s expansion and continued to delimit its geography. These days, there’s not much left of it.
But symbolically, it does have has some relevance to what transpired in over two days of meetings.
Because, as the very substance of the energy sector changes, so, too, will the manner in which it is all financed. And that requires some defensive walls among the bankers with whom I’ve been meeting.
In these circles, I am usually called upon to provide geopolitical and time-sensitive risk advisories. However, this time around the conversation is moving quickly to another subject entirely.
While public attention remains fixed on OPEC, crude pricing, and the impact on American unconventional (tight and shale) oil production, the discussion in London is already moving to the next stage.
The one where the guys with the big bucks make the even bigger bucks.
As several around the table called it, it’s the “next financing sequence,” and it will unfold based on three interlocking developments.
One of them has already begun. It’s the fall in oil prices resulting in a new equilibrium of about $70 per barrel in New York (the West Texas Intermediate, or WTI, benchmark crude rate) and $75 here in London (the Brent rate).
This first element is already nearing a close, with crude pricing rates likely to move up marginally from where they are at the moment. The consensus is forming that, apart from a major crisis or “geopolitical event” (apparently, the current politically acceptable way of mentioning ISIS, or a Russian military stroll in the neighborhood, the collapse of nuclear discussions with Iran, rising Kashmir tensions… you get the idea), lower oil prices are going to be around for a while.
In the aftermath, there has been a downward pressure in energy almost across the board, whether there is any direct connection to oil or not. This has been painting with a very broad brush. The result has been unjustified, creating oversold conditions in several market sectors.
Moving into a Massive Money Cycle
That leads to the second factor. Sustained prices at these levels will put renewed pressure on companies with higher cost production projects or – and this is the key here – heavy debt encumbrances.
For those who saw my Bloomberg World interview on Monday, I gave you a preview. It included a discussion about how credit matters have become a barometer with which to gauge likely takeover targets.
The key point is this: We are moving into a major cycle of M&A.
The aim among these big money guys is to marshal considerable funds and direct them toward specific targets. Other companies will fall by the wayside or be bought out for peanuts.
But the prized objectives will provide considerable upside. Unlike the mantra driving other “experts,” shorting either the raw materials or the companies is not the best way make the largest returns.
In fact, everyone I’ve been talking to here is unwinding short positions.
Sector consolidation is approaching fast, and this is where the majority of the money will be made. To accomplish this, a dual strategy is being employed utilizing both direct acquisition of assets and leverage, and the introduction of new derivative instruments to maximize the access.
Much of this is beyond the average investor. That leads to the third and most important element as it relates to retail investors.
Among oil and gas operators, the consolidation crunch will be initially centered on a designated list of smaller companies having efficient field operations with known and extractable reserves, good oversight, limited additional demand for working capital, and a manageable debt load. Their problem, as with all small producers, is having enough funding to bridge the gap.
Some of these are going to be acquired outright, while others will continue to operate under current corporate structures. Once the sector stabilizes and prices begin moving up again, I expect these to become the foundation for some interesting M&A action that will jump across energy barriers from one segment to another.
In short, the holdings will look different, as will the expectations.
Oh yes, there’s one more thing. I have the initial “hit list.”
Both Energy Advantage and Energy Inner Circle members will begin receiving the initial buy recommendations in the first quarter of next year. Much of this action will center on the London Stock Exchange (LSE) and its Alternative Investment Market (AIM). Outside investors are usually prevented from playing on either.
But don’t worry. I’ve figured out a way to break in there as well.