Analysts may agree or disagree, but their voices remain influential
The role of Wall Street analysts is changing, says Michael Bodino, co-head of research and senior E&P analyst with SMH Capital. For one thing, their role in the banking effort has diminished. They are now focused mainly on shorter-term investment horizons, including relative stock performance.
Speaking at a breakfast presentation at the Hilton Americas in Houston on Aug. 27, just before the opening of the Summer NAPE Expo, Bodino pointed out that research analyst goals remain the same:
- Remain objective;
- evaluate information; and
- provide thoughtful investment opinions.
"Oil and gas industry analysts have varied backgrounds and come from all walks of life," he said. "Some are engineers, geologists, geophysicists, and landmen; others are accountants, economists, and financial experts; and a few are consultants and even psychologists.
"Analysts don't always agree with one another," said the Dallas-based Bodino, "but that is what makes markets. We are conduits of information and talk to numerous people in the course of a day. We like to think we have our finger on the pulse of the market, and what we say can influence prices and investment decisions."
Bodino had some interesting comments on other topics as well. He mentioned that the markets still love resource plays, including unconventional gas. The reason, he suspects, is the lack of exploration risk in development assets and the ease of modeling. "Cookie-cutter wells are repeatable," he said. "Also, reserves are expandable, and it's hard to find conventional plays with the growth potential of the shale plays."
In addition, the economic returns allow for measurable equity value. "There is still that ‘jump on the bandwagon' reaction from folks," he said. "Everybody is doing it."
In terms of equity valuations and relative performance, Bodino compared year-to-date returns for resource players (41.7%) versus non-resource players (35%). Also, companies that are oil-levered (49.6%) in comparison with gas-levered firms (just 27.7%). And, finally, financially-levered companies are showing a 50.3% return compared with 28.4% for non-financially levered players.
Wall Street has been inconsistent, said Bodino. For example, XTO Energy and Chesapeake Energy tend to get preferential treatment compared to other, smaller companies, he said, reiterating that an analyst's goal should be consistency, regardless of a company's cap size or asset type.
Ric Saalwachter, SMH Capital managing director, provided a case study of a large project-oriented, high-growth company (ATP Oil & Gas Corp.) and outlined how SMH acted as financial advisor on ATP's private infrastructure partnership formation and private equity placement. ATP raised $1 billion in new capital in 2008-09. SMH conceptualized the formation of a private infrastructure partnership as an innovative way for them to raise capital, laying the groundwork for a future potential public MLP.
SMH acted as co-manager along with Goldman Sachs in ATP's successful effort to monetize its ATP Innovator platform, a $300 million asset located in the Gulf of Mexico. The transaction targeted energy-savvy investors. The effort resulted in a $150 million investment by GE Capital for a 49% limited partnership stake in ATP Innovator.
ATP maximized the value of the asset and maintains control as operator of the platform, while achieving an effective cost of financing, said Saalwachter. The investor recognized the long-term life of the asset and was willing to pay for it.
Two other case studies were presented, one by Quentin Hicks, SMH Capital vice president, on an international PIPE arrangement for TransAtlantic Petroleum, a Canada-based E&P and oil services company that was looking for funding to develop assets in Turkey, Morocco, and Romania.
Robert Lane, SMH Capital senior vice president, discussed midstream monetization, and his example was NGAS Resources, which monetized its $50 million Stone Mountain Gathering System, which was sold to Tulsa-based Seminole Energy Services.
Sylvia Barnes, head of the energy investment banking group at SMH Capital, noted the difference a year can make in the energy industry as crude oil and natural gas prices plunged about 12 months ago with the onset of the global economic recession, while company valuations and stock market prices fell precipitously as well.
In from New York, Michael Fitzgerald, co-head of investment banking, noted that while he is still "very concerned" about the huge deficit the US is amassing, he is seeing some positive indicators about the economy and is "somewhat optimistic" that the country has started down the road to recovery.