CERAWeek: Investors gambling on oil making U.S. “center” of oil market

HOUSTON – Investors are pouring capital and corporate debt into oil companies because they’re more afraid of missing the upside of an oil-price recovery than making a bad investment – a risky gamble, a private equity fund manager said Tuesday.

“We’ve been surprised by the amount of capital that’s flowed into the sector,” said Gary Reaves, a managing director at private equity firm First Reserve, during a panel of the oil industry’s financiers at the weeklong IHS CERAWeek at the Hilton Americas-Houston. Investors believe crude prices will recover, so “oil companies are getting a pass this time around. We attribute that to a world that doesn’t look very exciting right now – energy looks exciting because of the down-cycle.”

Reaves said he expects capital to keep flowing into the oil industry for now, but added that money is likely to delay a recovery in oil prices, he said, echoing comments by Occidental Petroleum CEO Stephen Chazen, who spoke at the event Monday. 

Oil-production firms have raised about $12 billion in new equity so far this year, more than capital markets pumped into the sector last year. For now, that’s easing financial pressure on firms and choking off the market potential acquisitions of assets and companies worth $150 billion around the world, of which $40 billion is on the auction block in the United States. Deal activity has fallen to its lowest level since the financial crisis in 2008, according to IHS.

“It’s incredibly challenging,” said William Stevens, global co-head of HSBC Bank’s strategic energy solutions group, explaining that the oil industry’s sellers and buyers can’t agree on prices at the moment and that it’s tough for buyers to find assets that can seamlessly bolt onto their existing infrastructure.

Stevens said this downturn’s flush and eager capital markets and flexible banks have taken the exact opposite role of the financial industry during the relatively quick 2008 oil crash, as banks dealing with their own liquidity issues compounded pressure on oil explorers.

Marcel van Poecke, managing director for Carlyle International Energy Partners, noted most of the capital availability has played out in the United States, and it’s still difficult to raise money in international markets, as investors are wary of distressed assets overseas.

Still, the panelists, who gathered in Houston from different corners of the financial industry, generally agreed mergers and acquisitions will pick up late in the year, especially among smaller firms, if the downturn stretches on and capital becomes less available. But the market hasn’t seen many distressed assets come up for sale yet – investors are keeping oil companies from nose-diving, said Roger Diwan, vice president of financial services for IHS.

In the United States, “the velocity at which you can bring that capital into production is weeks and months, not years,” Diwan said, noting the ability of companies and investors to bring U.S. shale fields into production quickly. “The availability of capital for me seems to be defining this era and is making the U.S. really the center of the oil market.”