From potential changes under the incoming administration of US President-elect Joe Biden to shifting investor sentiment amid an economy battered by the coronavirus pandemic, oil and energy companies will continue to face plenty of headwinds in using and raises capital, panelists said Nov. 13 at the virtual Rice Energy Finance Summit.
The current Republican-leaning Securities and Exchange Commission under President Donald Trump has promoted much deregulation that allows more private capital raises and broader access to capital for smaller companies and investors, and lessened the burdens for public companies, said Hillary Holmes, partner and co-chair of global capital markets practice at international law firm Gibson Dunn, during the webcast. "But if it's Democrat-controlled, we could start to see more regulation and changes in some of those rules," Holmes said.
In addition, if Democrats were to gain control of the US Senate—winning both January runoff elections in Georgia for a 50-50 seat split, with Vice President-elect Kamala Harris the tiebreaking vote—the chamber could pass laws that impose stricter conditions on capital raises, Holmes said.
Democrat Senator Elizabeth Warren and others over the last few years have introduced bills that present a host of requirements for energy companies with respect to use of capital they raise, including sustainability, disclosure, financial metrics, achieving those metrics, financial reporting, executive compensation, and retention of talent—all of which may be approved in a Democrat-run Senate, Holmes added.
Energy market value relies on pandemic rebound
Still, even if a Biden administration is not as industry friendly as the case is under Trump, industry stocks and investor appetite right now depend largely on eradicating the coronavirus pandemic and improving demand levels for oil and gas, she said.
The pandemic has devastated global oil demand by about 9 million b/d. Recent news of a vaccine tested to be 90% effective against the virus caused energy stocks to skyrocket, a surge which Holmes said shows the market value of the energy industry relies less on federal policy than on a global rebound from the pandemic.
But access to capital in general is a concern for the energy sector, she and other panelists agreed.
The oil industry, in particular the upstream sector, has had difficulty delivering returns on capital to investors, said Matt Brogdon, senior managing director of energy investment banking group for Guggenheim Securities.
"That has resulted in a change in investor preferences and led to question what is investable in E&P ... and also midstream," Brogdon said. "What we're seeing is fewer investors interested in, or are more discriminate about, investing in growth projects, and a shift in investor preferences to the [reserves] part of the assets."
Moreover, a "significant" chunk, perhaps more than half, of the lending universe is looking to exit the sector right now, said Michael Roberts, managing director and head of oil and gas capital markets for investment bank Houlihan Lokey.
"We're not seeing non-traditional lenders this cycle—the opportunistic entrants, the hedge and distressed credit funds—compared to [the oil price downturn of] 2015-2016," Roberts said. "The mezzanine funds, insurers, direct lenders that historically have focused on oil and gas are still present and have a fair amount of capital they're actively looking to deploy, but much more selectively and with more restrictive credit requirements than we're used to seeing from that group."
Balance sheet management important
Capital markets specialists spent a lot of time on balance sheet management this year, Holmes said, and she expects that to continue into 2021.
Bond issuances to refinance debt, along with tenders and bond exchanges, are examples of vehicles being used to raise capital for distressed companies, all designed to push out maturities and access liquidity. Investors might take a significant stake in a public company often in a tax-advantaged way, or a strategic investor may own half an acquisition target which is separated from a company's ongoing assets.
"It's a very creative product, very bespoke," she said, adding those structures have issues around governance shareholder interaction and approvals and around the long-term strategy for the public float. "It's an interesting strategy, and you can expect to see more that in late 2020 and 2021."
Brogdon said $30 billion of reserve-based loan credit has been lost in the upstream sector, with more to come.
"A lot of that capital is not coming back," he said. "We have to understand why. We've been financing ourselves as an industry effectively using credit cards: an RBL is very much like a credit card. So a question I often ask investors is, 'Would you finance your home on a variable-interest credit card where a bank literally had the ability to change the interest rate, change the maturity, call the loan or even decide to get out of the home lending business altogether?'"
"That would be a very dangerous proposition," he added. "So maybe the answer is something that looks like a mortgage."
One of the biggest challenges to correcting corporate balance sheets is the expectation of a return to normalcy, Roberts said.
"But I think old-style borrowing bases are done," he said. "When banks start lending again, it won't look the same. If you look in the new money market today for acquisitions finance, the only game in town for many is really the private capital space."
