Kim Bowater from Frontier Advisors, Nicholas Basso from Oaktree Capital Management and Mike Fox from Apollo Global Management discussed the evolution of investment opportunities in the US energy sector and how to access the US energy space.
Kim Bowater started the session by commenting that Frontier had started to explore opportunities in US energy in earnest early in 2015, after a sustained period of volatility in oil markets that saw prices fall from above USD 100/barrel to below USD 50/barrel. This has flowed through to the capital markets which funded growth in the US energy market. The high yield market in particular has experienced significant volatility in spreads – while this market is a potential way to access a stressed opportunity, it has been challenging so far.
Bowater highlighted that many energy companies, especially upstream players, invested significantly into the peak of the oil cycle and their viability is now under pressure. This creates distressed opportunities for investors that are ready to acquire and capitalise on undervalued assets – via transactions in both tradeable and private markets. Given the risks and complexity in the US energy sector, Frontier is of the view that partnering with a flexible opportunistic manager, with specialist energy expertise and a focus on downside risk management, is the ideal way to successfully access and execute on this market opportunity.
Nicholas Basso from Oaktree Capital Management, a long term investor in the US energy sector, provided his observations on the changes in oil market dynamics over the past few years. He said that as the US shale companies significantly increased oil supply over the recent two years, OPEC changed its market strategy from operating as oil price regulator to market share taker. Although demand growth has remained reasonably stable over the period, the massive supply from OPEC and changes in market dynamics will continue to create volatility in the short term. Given this macro backdrop, Oaktree believes US onshore shale oil is better positioned to withstand the short term risks. High quality US shale companies tend to have relatively low break-even costs and quick production turnover, which enable them to better respond to price volatility and realise return in a short timeframe. In terms of specific approaches to investing in US shale, Oaktree prefers the private structured transactions which provide better protections, covenants and opportunities to selectively invest in high quality assets.
Mike Fox from Apollo Global Management was largely in agreement, advising that Apollo’s approach to investing in oil was also to primarily focus on looking for high quality investment opportunities with a reasonably high margin of safety, and noted that the environment so far had proven challenging. Fox also commented on midstream energy assets, such as energy infrastructure and pipelines. Apollo maintains a more critical view towards the midstream companies – the near term cash flows generated by their assets might be attractive, but the long term demand is quite unpredictable. The uncertainty and complexity in the midstream companies are factors that discourage Apollo to make meaningful investments in this space.
Written by Frontier’s own “Journalist in training”: Alan Li