When Even The Sweetest Crude Tastes Sour

by Deon Daugherty, Senior Editor

Oil and gas companies going hat-in-hand to the capital markets and private equity funds are finding themselves in a tougher negotiating position after a consistent year of all-around poor market performance.

At the beginning of 2015, there was plenty of interest in the capital markets to invest in oil-related stocks, whether it was oilfield services companies, upstream, midstream and throughout the industry, Bob Gray, a corporate transactions lawyer at Mayer Brown LLP in Houston, told Rigzone.

“They did, and they got burned,” Gray said. “And there’s also a whole bunch of money that came in through private equity, and they got burned because everybody expected the value of WTI was going to shoot back up and things were going to get rosy again. But that has not happened.”

And so The Street, at the moment, has lost interest in energy. That’s certainly brought changes to the mergers and acquisitions cycle.

As Charles Kelley, lead partner in the litigation and dispute resolution site at Mayer Brown, explained, investors are often bullish on debt-acquisition where they can buy second liens or first lien debt and make a purchase at a discount for the whole position in the hopes that they can then recover higher values.

Instead, even among the most successful players in private equity, such as Apollo Global Management, Cerberus Capital Management, Oaktree Capital and Silver Point Capital, the returns have been dismal.

They’ve all traditionally been shrewd purchasers who come in at the right time, Kelley said, and yet some have taken positions believing the industry had reached the bottom and the time to buy was right. Within months – and in some cases, weeks – they’d realize they paid too much and lost money on the deals.

“That’s what I’ve heard – again and again – even last week, from Wall Street,” Gray said in early December. They “got burned last year and again this year, and, ‘We’re not going there. We thought we knew [oil and gas], but we don’t know the industry.’ And that’s really what it is, they don’t know the industry.”


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