2020 Oil & Gas Crisis

Perspectives on the US Energy Landscape

The US energy industry is undergoing its most significant downturn and period of distress in modern history

  • Biggest oil demand shock in modern history due to Covid-19, resulting in medium term decrease in global demand of up to 30 M bbls/d (out of total global demand of approximately 100 M bbls/d)
  • After initial supply shock in early March due to OPEC+1 failure to reach a supply cut, leading to the lowest oil prices in 3 decades, OPEC+1 and other countries agreed to a 10 M bbls/d or greater supply cut in April
  • However, this cut will not come close to making up for the 30 M bbls/d demand loss, thereby potentially leading to continued prices in the $25-35 per barrel range for the foreseeable future

The result has been and will be a period of severe distress for US energy companies across the value chain

  • The oil and gas market downturn has not discriminated between companies in the lowest cost production areas (such as the Permian or Marcellus), which have premium “rock” and are profitable at lower oil and natural gas prices, and higher cost areas – both types of companies have been equally battered in the market
  • The market has also not discriminated between the upstream exploration and production sector, and the more stable energy infrastructure and defensive energy services sector
  • A number of companies have excessive leverage and need to be downsized or restructured through rescue financing or bankruptcy; unlike the last US energy downturn in 2015-16, the capital markets are essentially “closed” and are not issuing new equity or debt and “rescuing” these company during a crisis

This downturn will therefore be unique for the US, in that it is occurring during a period in which it overtook Saudi Arabia as the world’s leading oil producer (at 13 M b/d) as well as becoming the world’s leading natural gas producer

  • Even if the industry contracts in the US (which is likely), the US will still be producing more than 10 M b/d of oil and 80+ bcf/d of natural gas
  • Critical infrastructure (especially midstream and downstream) as well as services for the industry will continue to be fundamental to supporting the industry
  • This dislocation should therefore lead to unique opportunities work with resilient assets at attractive, and in some cases distressed, valuations
  • As a result of the above dynamics, this could be one of the most attractive entry points to invest in energy in American history
  • The best time to participate in the US energy industry historically has been when everyone is running for the exits, and the market is currently experiencing an extreme case of that herd mentality in the equity, credit, and private asset classes