What a difference a year or two can make. In our March 2014 Energy Banking section, we talked about a flourishing oil and gas industry and a robust energy banking sector that had rebounded from a tumultuous couple of years in 2008-2009 when the global economy went in the tank. By early 2014, the shale business was in full bloom. The petroleum industry had made an amazing comeback and the energy banking sector that supports it was thriving.
Even last year in our March 2015 issue, we talked about how energy bankers were working closely with upstream companies and midstream processors and transporters as oil prices fell to less than $50 a barrel. At that time, most people thought the downturn would be short lived, and companies would only have to manage through the down cycle a few more months. The banks were telling operators and service companies that they had their backs - and for the most part they did. It's good for business when your customers are successful.
Fast forward to March 2016. Although we're all hoping for another comeback with higher prices that make drilling and production economic, most of us are skeptical that this will occur anytime soon. Maybe in the second half of this year. Maybe in 2017. The crystal balls aren't revealing much information. Many who forecast a short downturn a year ago are looking a little foolish now, so fewer prognosticators are willing to stick their necks out as this downturn starts to look a bit like the 1980s. Analysts are hedging their price predictions the way operators should have hedged their production.
As far as investors are concerned, energy companies should heed the old axiom: "Promise less and deliver more." It's always better to lower expectations and then exceed them than to raise expectations and fall short. Investors, analysts, and credit rating agencies do not like broken promises.
In this issue, Rob Purdy, Shane Randolph, and Matt Smith of Houston-based Opportune examine E&P hedging during the price downturn and the role it plays in risk management and in financing activities. Management teams should review their strategies closely and discuss future commercial implications and financial reporting ramifications of those strategies.
In addition, Shantanu Agarwal of Energy Ventures US Inc. discusses investing in technology companies during a downturn. He points out that technology investing involves additional risks and requires industry-specific expertise to be able to pick winners from losers, adding that it is not for the faint of heart.
We hope you find this month's content interesting and useful.