Investment Banking in the Oil and Gas Sector (PDF)

Investment banking is a subset of commercial banking that focuses on organizing significant, intricate financial transactions like mergers or underwriting for initial public offerings (IPOs). These investment banks can assist businesses in a multitude of methods when it comes to capital raising, one of which is underwriting the issue of new securities for an organization, whether it be a corporation, a municipality, or another institution. They could oversee the initial public offering of a company. In addition to this, investment banks offer guidance in the areas of mergers, acquisitions, and reorganizations.

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Investment bankers are professionals who have their fingers on the pulse of the present investment atmosphere and can provide advice accordingly. They guide their customers through the complicated landscape of the high finance industry.

History of Investment Banking

Although the word “investment bank” did not become common until the latter half of the 19th century and the early part of the 20th century, investment banking services have been around for far longer than Wall Street.

The oldest investment banks got their origins as merchants dealing in various goods such as spices, silk, metals, and other similar things. The phrase “merchant bank” refers to an investment bank in the United Kingdom, which is home to London, which is still considered one of the most important financial hubs in the world.

The nineteenth century witnessed the establishment of several influential banking partnerships, including those established by the Rothschilds, the Barings, and the Browns. At this point, investment banking had transitioned into its contemporary form, with banks beginning to underwrite and sell government bonds.

Investment Banking in the Oil and Gas Sector

Definition of Oil and Gas Investment Banking In the oil and gas investment banking field, specialists offer guidance to businesses that look for, produce, store, transport, refine, and sell energy on how to raise debt and equity capital and complete mergers and acquisitions.

Exploration and Production, often known as “Upstream,” refers to the phase of a company’s operations in which it searches for oil and gas deposits in various areas and then drills for them. After discovering reserves, the company then produces the energy.
Storage and Transportation (also known as “Midstream”) Companies are responsible for transporting oil and gas from the producers to the refiners using a variety of different ways, including pipelines, tankers, and other vessels.
Refining and Marketing Companies (also known as “Downstream”) take crude oil and natural gas and transform them into useable goods such as gasoline and jet fuel for automobiles and airplanes.
Integrated oil and gas firms engage in all the activities mentioned above and have geographic diversification. Many are wholly or partially controlled by national governments (sometimes known as “national oil firms” or “NOCs”).
Energy Services, often known as Oilfield Services or simply OFS, provide “assistance” to the companies described in the previous paragraph. These organizations rent drilling equipment (rigs) or provide engineering and construction services. They do not have direct ownership of any oil and gas reserves.

Suppose you work in oil and gas investment banking. In that case, you will often concentrate on one of these verticals, which, depending on the state of the market and your objectives for the long term, can be either beneficial or detrimental to your career.

There is no universal standard for how banks organize their oil and gas units. For instance, Morgan Stanley classifies oil and gas as part of its “Energy” business, although Goldman Sachs and Bank of America include it in their “Natural Resources” section. It is possible to classify oil and gas alongside mining, power/utilities, and even renewable energy, but these industries are distinct.

Recruitment Process

Because the oil and gas sector is so specialized, you will have a significant leg up on the competition if you go into interviews with experts in the relevant area or technical understanding (e.g., petroleum or geophysical engineering). Although it is not strictly necessary, having it can be a deciding factor between two or three applicants who are otherwise highly comparable.

In addition, expertise is not enough; you must also display an interest in the business if you want the best chance of breaking into it. This might refer to anything from an energy-related internship, group, or activity that you participate in into additional coursework that you’ve done or even a sort of family history.

It is also important to note that many financial institutions have distinct “acquisition & divestiture” (A&D) teams in addition to their “coverage” oil & gas investment banking teams. The focus of the A&D teams is on asset-level negotiations, such as the purchase or sale of an oil field rather than an entire firm. To evaluate these assets, the A&D teams often look for people with technical expertise, such as reservoir engineers, to fill their employees’ roles.

Therefore, if you have a technical background, it will be much simpler to enter this market if you target A&D teams rather than typical IB coverage jobs. This is because there is a greater need for A&D team members in traditional IB coverage roles.

A reputable university or business school, excellent grades, past internships, and great networking and preparation are the attributes that banks seek in applicants. Aside from that, banks search for the same qualities in candidates that they do anyplace else. You don’t need to be an “expert” in the technical particulars of oil and gas, but you should be familiar with the following subjects:

The many verticals and how the business models, drivers, and risk considerations vary for each one. The valuation, notably the NAV Model for upstream firms, and the slightly different indicators and multiples (keep reading). A recent transaction involving the energy sector, preferably one that the bank you are interviewing with, was involved in advising on.

A comprehension of Master Limited Partnerships (MLPs), covering why many midstream corporations utilize this structure and why other organizations have turned away from using it. Your country may have several different basins or producing areas. For instance, if you are going to an interview in Houston, you should be familiar with the Permian Basin, Eagle Ford Shale, and Barnett Shale, as well as the ways in which their output and expenditures are distinct from one another.

Finally, if you are applying for a job located outside a significant financial center like Calgary in Canada or Houston in the United States, it is essential to establish some links to the local community. These organizations do not want to recruit bankers just to have them leave after one to two years to pursue opportunities in Toronto or New York.

Role of Associate in Oil and Gas Investment

The upstream oil and gas industry, often known as the E&P sector, is where most individuals want to work because they feel it offers the most genuine opportunities.

They are partially correct; E&P has the most significant corporate-level mergers and acquisitions activity out of all the verticals.

After searching for all oil and gas mergers and acquisitions as well as capital markets agreements with a value of over one billion US dollars for the past three years (globally), I obtained the following results:

88 meters upstream (mostly corporate M&A with a mix of the other deal types)
Midstream: 85 (combination of asset deals, M&A, debt, and even some private equity activity)
31 is located downstream (mix of everything, but no private equity activity)
Counted as integrated: 79 (almost all equity and debt offerings and a few asset deals)
18 services offered (mix of everything, with one notable PE deal)

Upstream is your best choice if you want to have an experience that is more typical of investment banking; this supposes that commodity prices have not suddenly plummeted. Integrated Oil and Gas can also be a viable career option; however, if you work for one of the central banks, you will mainly advise large firms on potential asset transactions and provide finance occasionally.

The Downstream and Services divisions often have less transaction activity than other business areas, and most of their relationships with large businesses take the form of “continuous advising.”

Additionally, there are not many “independent” downstream businesses in essential markets such as the United States, meaning there are few sell-side M&A candidates. Since storage and transportation firms act more like utilities, many individuals fail to recognize the potential of the Midstream vertical or incorrectly think that it is “boring.”

There is some validity to that, but on the other hand:
This industry perhaps has the broadest selection of available discounts.
It is less susceptible to changes in the prices of commodities than others.

And since there is more private equity activity and midstream buyouts are specialized, it may be your best choice if you want to enter the energy private equity industry because of the increased competition.

Trends

The following are some of the most critical drivers for the overall sector:

Prices of Commodities

A general increase in oil and gas prices benefits most businesses in this industry, but this advantage is not often felt directly. They motivate firms to invest more money to discover new reserves and improve their current output, which is the reverse of what happens when prices are lowered. The need for supporting infrastructure, drilling services, and engineering services is also driven upward by higher pricing.

Production, Reserves, and Capacity in the Oil and Gas Industry

Upstream firms are racing against time to replace their reserves as they get exhausted. However, even if they locate more sources, it often takes between 12 and 18 months for them to come online. Because of this time lag, interruptions to production capacity, such as wars, sanctions, natural catastrophes, and so on, can considerably influence market pricing.

Capital Expenditures

How much money are businesses shelling out to explore new reserves and to keep their current production levels up? The amount of money spent on CapEx influences the demand for energy services as well as the quantities of resources that Midstream and Downstream businesses handle. This causes a ripple effect that can be seen across the whole oil and gas sector.

Midstream businesses

Midstream businesses are frequently considered a “safe investment” alternative to bonds because of interest rates and monetary policy and are comparable to utility companies. As a result, higher interest rates tend to make them less appealing. Also, higher rates make it more difficult for E&P companies and other businesses to borrow loans to finance their operations.

Taxes, (Geo)Politics, and Regulations

Has the federal government raised taxes on the Production or use of oil and gas? Have Russian forces invaded the territory of another nation? Are energy corporations subject to a “windfall tax” imposed by lawmakers? Even the slightest indication that governments will support or oppose activities can cause significant shifts in businesses’ strategic plans.

Conclusions

In short, it is right to say that without investment banking, the oil and gas industry could never have flourished. Investment banking does have its bright and dark sides, but it is safe to say that the more optimistic side is luminous enough to outshine the dark one. The industries need strong financing management to keep their trades going as they must deal with the work at the national and international levels. And for this purpose, investment banking does play a crucial role in the sustainability of oil and gas industries in their competitive sector.

FAQs

Which industry offers the most favorable conditions for investment banking?

Finances of the Corporation Corporate finance encompasses several of the “most prestigious” roles in investment banking, such as advising on mergers and acquisitions, raising capital, and assisting companies in reorganization.

What are some of the difficulties that investment bankers must deal with?

If fewer financial resources are allocated, there will be less work for investment bankers in general. This means that the business they do will suffer. Due to the protracted recession the company is experiencing, this problem has become a challenge for the whole industry. There is an Urgent Need to Cut Costs: The level of competition in global markets has been steadily rising for some time.