The oil and gas industry was already facing significant disruption before the pandemic, which hit the industry hard as prices bottomed-out along with investor sentiment. As part of its efforts to help oil and gas clients find their footing amid unprecedented challenges, Alvarez & Marsal recently announced the hiring of 30-year energy and financial management industry veteran Patrick Hickey as a Managing Director in the firm's Houston-based energy group within its Corporate Performance Improvement (CPI) practice. Consulting recently caught up with Hickey to talk about the evolving oil and gas landscape, unique challenges the sector is facing in the waning days of the pandemic, and the consulting opportunities he sees in the marketplace.
Consulting: What do you see as the overall state of the oil and gas market?
Hickey: The industry was experiencing a downturn with poor investor sentiment even before the pandemic. Then, COVID-19 hit. That paired with the Russia OPEC price war sent things into a tailspin in 2020. Overall, substantial headwinds remain for the sector including ESG concerns, capital available only for "better brand" names, and continued pressure from investors to re-allocate capital and deliver a return on capital.
We will continue to see consolidation from companies big and small this year. Creditors have been forced into becoming reluctant owners through bankruptcy and restructurings; they are not natural long-term owners and will want to sell once the market recovers. Companies emerging from bankruptcy with improved balance sheets will be attractive merger candidates.
It is encouraging that we've seen an uptick in prices kicking off this year, but generally all these same themes from 2020 still apply.
Consulting: What are some of the biggest challenges oil and gas industry clients are facing currently?
Hickey: One of the biggest challenges oil and gas companies are facing is declining investor sentiment; companies need to earn back investor trust. Energy equities recently have grossly underperformed. The E&P index is down 45% since 2014, compared to 100% increase in the S&P and over 200% increase in NASDAQ. Five years ago, upstream was trading at the highest multiples in the S&P, and now it is the worst. The market's shift away from the Energy sector is also highlighted by its representation in the S&P, declining from 6.5% 5 years ago to 2.28% at the end of 2020.
Another challenge is the reduction in available capital; even bank debt is limited. The ability to put together a large bank syndicate is difficult, and many capital providers are getting out of the upstream and midstream sectors altogether. Capital will cost more and will be less available, which will limit the bidders for assets. In turn, this will impact valuations. Lastly, there is an ESG-driven move towards lower carbon usage. Capital is being reallocated to companies embracing this change, and companies must be willing to transform to achieve attractive equity valuations.
Consulting: What are the biggest consulting opportunities you're seeing out there?
Hickey: One opportunity for consultants surrounds restructuring, although less so as we complete this initial wave. Where we will find the most opportunity is in M&A and consolidation/merger related services. This includes transformation services, focusing on synergies and cost cutting, and creating efficiencies around capital and operational structure. We also will see opportunities as ESG issues increase over the coming years.
Consulting: How have oil and gas sector clients' priorities or major concerns changed in light of the pandemic?
Hickey: There has been an emphasis on reduced costs and capital spending, with a focus on free cash, reduced leverage, and a return of cash flow to investors. Companies are no longer about growth for the sake of growth; they are now more focused on a return to their investors. Additionally, with more efforts surrounding ESG, management incentives need to be aligned to this new paradigm. Not only do objectives need be tied to financial metrics, but ESG metrics as well.
Consulting: How much do fluctuating global oil and gas prices impact clients, and how are consultants helping companies mitigate risk and weather those ups and downs?
Hickey: Fluctuating oil and gas prices have a substantial impact on our clients. The volatility in commodity prices has created a lot of the problems that the industry faces today. This price volatility highlights the importance of commodity hedging to stabilize cash flows and more efficiently allocate capital. Additionally, there is an emphasis on cost structure; companies need to be able to survive in a low price environment, which is driving consolidation in the industry. The goal for us as consultants is to help our clients lower their cost structures through synergy capture – this in turn creates the resiliency they need to weather the ups and the downs.
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