29 Nov Oil and Gas Industry Research Report — 2017
In 2016, the United States was the number one producer of petroleum in the world beating out heavy hitters such as Russia and Saudi Arabia. The Oil and Gas industry in the United States has been extremely influential and played an integral part of markets both domestic and international for over 150 years. John D. Rockefeller, the wealthiest American of all time, made his fortune by his domination of the Oil and Gas industry in the late 1800s. As of 2016 Petroleum is the number one source of energy for Americans (followed by natural gas) as measured in BTUs used per year. Petroleum and natural gas make up 64% of the energy used in 2016. Besides energy production, oil is used to make lubricants, wax, asphalt, fertilizer, and plastics along with a variety of other products. In 2015 the top oil producing state was Texas followed by North Dakota and then California. Despite threats, the oil and gas production will continue to be a crucial part of the economy for many decades in the future.
The largest development in recent history is the use of hydraulic fracturing (fracking) to reach previously unobtainable sources of oil and natural gas. This has resulted in one of the largest booms in United States oil production history. Because of the recent increase in production, the United States now produces more oil than any other country. This has driven down prices worldwide from a high of 133 dollars a barrel in June of 2008 down to the February 2016 low of just 33 dollars a barrel. In order to remain profitable, oil and gas companies cut capital expenditures by 40% from 2014 to 2016 because of the oil price collapse that began in June of 2014.
The oil price collapse has led some companies to find ways to stay profitable despite dips in the price of oil even when the price of a barrel of oil drops down to the high twenties. The price of oil has remained stable in the last year with a slight upward trend in the price. This is likely to continue in the near future unless something dramatic happens to the global oil and gas industry.
In 2016 in United States, there were 63 oil and natural gas companies. In the rest of the world combined there were a total of only 26 companies. This is partly due to fact that many countries have chosen to nationalize their oil production so some of the largest oil producing nations such as Saudi Arabia only have one company that produces and sells their oil. In the United States, the free market reigns and this results in the large variety of companies that we see today. With so many companies producing an identical product, there is ample opportunity for increased mergers and acquisitions in the oil and gas sector.
In addition to mergers and acquisitions, companies are also trying to raise capital. Because of the new opportunities presented by hydraulic fracturing, companies are looking to expand to take advantage of previously unreachable sources. To fund this growth, these companies will need to find some way to raise money to fund exploration and research new methods to make extraction more cost-effective. This is a perfect opportunity for an investment bank as it can help and profit from the issuance of stock and new debt.
The largest amount of growth in the oil and gas industry in recent years has overwhelmingly been from the expansion and use of hydraulic fracturing. In 2005 the United States imported over half of its oil. In 2011 the United States became a net exporter of oil as a result of the extraction of previously unexploited sources. This presents an almost unprecedented opportunity for growth. The last time the United States was a net exporter was before the 1950s. Companies are looking to expand so that they can meet rising demands and be competitive on the international oil market. With new opportunities come new companies that will create more value on the market.
This presents a great opportunity for those who can help companies raise capital. Companies are issuing stock as well as debt to be able to full take advantage of the growth opportunity. As the technology improves, the cost of producing the oil and gas will go down and this will create value for stockholders and investors. Even with the expansion of alternatives, oil and gas will continue to be the primary energy’s source for energy. Countries that (historically) have previously not demanded large amounts of energy are starting to use more and more. Even if the United State has a dramatic shift to renewable energy, there will most likely be still be large profits to be made by exporting oil to a large variety of markets.
Despite the historical power and recent growth of the oil and gas industry, it has never been more at risk than it is today. Competition from renewable sources coupled with the rising popularity of electric cars are giving rise to fears of disruption. Oil prices have plummeted in recent years causing a lack of profitability for some. Whole countries have committed to phase out gas cars in the coming decades with the possibility of triggering a large potential decrease in overall demand for oil and gas products. The price of oil has proven to be quite volatile in recent history and that presents a problem for those who are in the industry as a sudden shock to the price can cause record profits or losses with almost no notice.
Growing concerns for environmental impact have also taken their toll on the oil industry. On November 16th, 2017, the hotly protested Keystone pipeline sprung a leak and spilled upwards of 210,000 gallons of oil, confirming the worst fears of those who fought against the pipeline’s construction. This will inevitably increase the public’s negative opinion towards those who built and approved the pipeline as well as the oil and gas industry as a whole.
There is also a growing opposition to hydraulic fracturing due to several environmental concerns. Some fear the risk of contaminating the water supply due to the process of injecting chemical additives that fracture the rock and can cause chemicals to end up in drinking water.
There are instances in which hydraulic fracturing activities have contaminated the water supply. These operations had been ignoring regulation in their activities. When done right, however, hydraulic fracturing appears to be safe overall. Since a large amount of the growth in the United States’ oil and gas industry in recent years has come from hydraulic fracturing, if it was banned because of disaster or public outcry, there would be massive repercussions across the oil and gas industry both globally and domestically.
Ultimately, the oil and gas industry (and by relation, oil & gas M&A) will continue to play a large role in the economy of the United States. The variety of opportunities is unprecedented and will continue to be a great place to invest. Renewable energies are on the rise but will take a very long time to get to the point that they will completely replace oil and gas. Politically, the lack of dependence on foreign oil is good for the United State as it doesn’t have to rely on other countries for its energy needs. The large amount of oil companies presents a ripe opportunity for mergers and acquisitions and the new oil fields motivates companies to raise capital to take advantage and grow. New stock will be issued along with new debt. Oil and gas will endure as the largest sources of energy and will continue to be a great place to invest.
- Really Big Oil, The Economist, 2006-08-10T00:00:00+0000 , available at http://www.economist.com/node/7276986.
- CNN, Mayra Cuevas and Steve Almasy, Keystone Pipeline Leaks 210,000 Gallons of Oil in South Dakota, , http://www.cnn.com/2017/11/16/us/keystone-pipeline-leak/index.html.
- FRED, Global Price of Brent Crude, -01-01 1980, , https://fred.stlouisfed.org/series/POILBREUSDM.
- Fiona Harvey & environment correspondent, Oil Demand in Developing Nations Overtakes Industrialised World, The Guardian, -05-14T14:11:33.000Z, 2013 , available at http://www.theguardian.com/environment/2013/may/14/oil-developing-nations-shale-oil.
- Adrian del Maestro et al., 2017 Oil and Gas Trends, , https://www.strategyand.pwc.com/trend/2017-oil-and-gas-trends.
- Chris Tomlinson, How Oil Companies Raise Money is Revealing, -03-21 05:51:00 2015, , http://www.houstonchronicle.com/business/columnists/tomlinson/article/Oil-companies-are-raising-money-how-they-do-it-6146100.php.
- S. Energy Information Information, U.S. Energy Information Information, , https://www.eia.gov/.
- ClimateWire Vaidyanathan Gayathri & ClimateWire Vaidyanathan Gayathri, Fracking can Contaminate Drinking Water, , https://www.scientificamerican.com/article/fracking-can-contaminate-drinking-water/.
Tyler Black contributed to this report.