Buckle Up: 2016 Will Be Wild & Unpredictable

This post is also available at my LinkedIn profile page, located here

When crude oil prices started their dive down in late 2014 and continued during the start of 2015 until ultimately realizing 3- and 4-handles, it became pretty apparent to me that 2015 would be a volatile and painful year of the industry. Volatility has been in ample supply in the commodity market and overall financial market. Oil prices over the past several months have made moves higher and lower on an almost-daily basis, rarely content to sit idly. Several prognosticators in 2H 2015 publicly called for bottoms in oil, and then watched as prices fell through the floor of what was believed to be the figurative pricing basement. In an interesting sea change, the “global conflict/risk” factor that could typically be counted on to cause small spikes in pricing are now doing the opposite due to the context of the current strifes – countries in the Middle East tripping over each other to achieve maximal oil production output.

Most of you have probably heard the adage that money is made during the downturns, before the subsequent booms – this is the time where the critical make-or-break decisions are being made, and the funny thing is that we won’t know which ones are the prescient ones for a period of time. There was much expectation industry-wide that overleveraged exploration companies would begin experiencing great financial strain when lenders and banks would inevitably reduce borrowing bases and revolving credit facilities during the Autumn asset base redetermination process. However, much to our collective chagrin, most banks and lenders balked at tightening the screws; the companies that thought the end was nigh were able to kick the proverbial can down the road, but this contentment is fleeting.

It is now 2016; hedges are expiring, banks and lenders are growing impatient, and the price of oil appears to be maligned in a price range that it will probably be stuck in for most of the year. Several companies have already filed for Chapter 11 reorganization (Swift Energy being the one of the latest). We heard that M&A activity would ramp up in 2015, but this never really panned out. Now 2016 is being heralded as the real year of oil and gas industry M&A. I would argue that the M&A will still come in under what people are calling for: any company that is in the universe of being financially distressed will not be an attractive candidate to be acquired. Companies in good financial standing will just wait for these distressed (or soon-to-be-distressed companies) to collapse and die, circling like vultures and waiting for sales of assets to benefit their secured creditors for pennies on the dollar. I expect companies that have asset profiles that would be complementary and more synergistic as one to at least kick the tires on mergers.

2016 will be an interesting year in our industry. There will certainly be companies that are taken down this year, and we will likely look back on several shrewd and well-calculated moves that occur this year as being catalysts for the oil and gas powerhouses of the next oil boom, whenever it might be.

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