While investing in the energy sector is seen by some as a very desirable route to take, for others there are great concerns caused by the oil slump seen recently. With some of the largest banks unable to sell loans made in 2014 to energy companies, despite cutting prices, Wall Street has been left with $31 billion in fees purely from financing energy-company stock sales.
This is not the first time this has happened, however, Sherif Hamid, vice president of high yield at AllianceBernstein, stated ‘We often go through these periods…We saw it in Europe during the sovereign crisis where banks needed to sell at prices where buyers were willing to step in, even if it meant taking a loss, but it doesn’t mean the market is closed”
The main financial concern with the decrease in oil and Natural Gas prices is more to do with confidence. As soon as a decline in cost is mentioned, particularly in the energy industry, people are concerned that this will have a detrimental effect on industrial expansion and, therefore, the entire economy. While some U.S. based energy corporations have already started to cut back on wells, production and even workforce numbers in order to manage the fear of substantial loss, this concern may be too hasty.Many of the loans that are yet to be sold could still recover value if the market sees a return to previous levels, yet the chances of this are hindered when investors join in on the knee-jerk reaction to withdraw money as soon as they see a dip.
This is not to say that investment in this sector should be ruled out by any means, however. The fact that UBS have recently created a specialised oil and gas investment banking team demonstrates that there is still ample profitable opportunity here. In fact, UBS look to be creating opportunity from the concerns, presumably on the proviso that if one bank offers what others don’t, that bank will find great prosperity. Success, however, is predominantly related to the level of expertise one has in the industry. For this reason there are a number of energy, engineering and oil and gas sector graduates that move over to investment engineering. Although there is undoubtedly a monetary factor in these moves, investment engineering is known to give a much broader view of the oil and gas sector than targeted energy engineering. Plus such an advanced level of oil and gas industry expertise compared to a purely financial background is highly valued in the banking world.
This is not anything new, of course someone with a strong background in an area their clients want to invest a lot of money is of great value. But in the oil and gas sector this value is greater due to the incredibly complex nature of the industry. So more than elsewhere, understanding specifics such as the process of oil extraction and what it involves with regards to the oil market distribution offers a much more valued perspective than at financial investment level.
Furthermore, having a fuller understanding of the metrics involved in the oil and gas industry allows a much more accurate and reliable forecasting ability, which is essential when it comes to successful investing. Having an overview of industry advancements as well as their economic standing gives an added intelligence to investment choices; for instance, with environmental concerns there is a rapid push to improve the efficiency in heavy industry due to government and social pressures. Therefore, the importance of condition monitoring equipment such as acoustic emission sensors or continuous emissions monitoring systems in the future success of the energy industry is paramount. But it will only be those with a full understanding of the industry from an engineering, as opposed to financial, perspective that will appreciate this. By striving to make the oil and gas industry more efficient, banks will be able to not only build confidence in the industry once more, but also stand a much better chance at turning the market around.
So while there is fair cause behind the concerns as banks are indeed struggling to sell loans, it is only if corporations and investors take action on these concerns that will lead to a serious economic problem within the oil and gas industry. Instead, the example set by UBS in introducing experienced professionals within the target industry to offer a much deeper and effective insight should be the approach taken. Of course if everyone takes this approach the market will become saturated, but in times of a lack of confidence the initiative of even just one can make the difference that could save the market.