Energy Market Dislocation Creates Investment Opportunities
NEPC, a full-service investment consulting firm, released the results of an extensive research study into the investment potential brought about by the dramatic decline in oil prices.
“Oil prices have declined to below $50, significantly below its one-year high of $107 reached in June 2014,” said Sean Ruhmann, partner and head of Real Assets Research at NEPC, who is leading a cross-functional research group of 12 investment professionals focused on the dislocation in the energy sector. “Most investment managers and industry professionals expect that oil prices will remain volatile over the next year and may begin to rise towards more sustainable long-term price levels over the next 18 months, a view which NEPC shares.” NEPC has been evaluating the spectrum of liquid and illiquid oil-related investment opportunities for client implementation to capitalize on the dislocation.
NEPC points to the continued oversupply and relative stability in the energy supply chain, low economic growth, and the strength of the US dollar as reasons for continued suppression of oil prices in the near term. Most expect that supply and demand forces will likely see oil prices settling in the $70 to $75 range, or a price higher than current values that works for most producers given lower services costs, over the next 18 months.
Under that scenario, NEPC believes that public E&P companies and energy services companies will experience varying degrees of distress with winners and losers. “As oil prices remain low, hedges roll off, revolvers get resized and cash flows decrease, many of these companies will experience pain and distress, generating a variety of investment opportunities. This process has already started to occur with a handful of companies and it is only expected to grow during the rest of the year and into 2016.”
“Determining the best energy investment strategy today is both complex and requires a view on the future price and volatility of oil,” said Ruhmann, “we’ve thought through this using three different scenarios to evaluate the opportunity set (1) Oil remains volatile for the first half of 2015 but rebounds to $70-75 by year-end, (2) Oil remains volatile in current range but rebounds to $70-$75 in the next 18 months and (3) Oil remains volatile around the current range well past 201617.”
NEPC views scenario two as the most likely outcome. Given this as a baseline, NEPC’s view of the investment opportunity and environment are as follows: In the near-term longshort equity strategies and stresseddislocated credit strategies should be attractive. Longshort commodity strategies could be interesting assuming volatility persists. The longshort commodity play, using commodity derivatives, is less a bet on the path of oil but the interim volatility of oil and the manager’s ability to gauge price movements. As the stress starts to build in late 2015 and 2016, distressed credit, rescuebridgeDIP financing and private equity strategies should become attractive.