- By Todd G. Povlich, CFA, ASA
- March 13, 2015
What a difference several months can make in financial markets, especially within the energy sector. Within the past year we have seen $90+ per barrel oil prices and $3.50+ per gallon gasoline prices. However, as 2014 wore on, market dynamics changed and oil prices started a decline to levels not seen since the depths of the last recession.
Is OPEC maintaining production levels to push prices lower because it fears real competition from U.S. shale oil and is afraid of losing market share in the U.S.? When prices are significantly lower than $100 per barrel, life is much harder for the higher cost / marginal U.S. shale producer.
According to Goldman Sachs, “[There is a] realization that the OPEC reaction function has changed and that the US shale barrel is now likely the first swing barrel … When Saudi Arabia cut prices to Asia for November delivery it was interpreted as a shift in the Saudi reaction function to a focus on market share. This should have not been a surprise in the new world of shale that has flattened the supply curve, as economic game theory suggests that they should not be the first mover and that the US shale barrel should be the new swing barrel given how easily it can be scaled up and down.”
Since June 30, 2014 WTI and Brent crude oil prices have plummeted more than 50% due to excess supply and speculation among traders about OPEC’s future actions. Management teams throughout the energy sector are reassessing business plans, capital projects and production levels while trying to figure out how long OPEC can maintain their stance and how much their companies’ revenues, earnings and stock prices will fall.
As quickly as the energy landscape has changed, it can stabilize or reverse course just as fast. Reuters, citing several Gulf oil and OPEC sources, reports a general belief that prices will ultimately stabilize at between $70 and $80 per barrel, most likely before the end of 2015.
In the meantime, prices and multiples across the energy sector have dropped precipitously, raising the question: Is it Time for Estate Planning in the Energy Sector? With prices of some publicly traded companies in the sector down 40%+ from the peak in mid-2014, there may be a unique and unexpected opportunity for estate planning in the sector.
The Vanguard Energy ETF declined from a high of $143.96 in June 2014 to $106.20 at the end of January 2015. Further analysis on companies based in the U.S. with enterprise values less than $10 billion shows that stock prices for oil and gas exploration and production companies decreased by approximately 54% from June 2014 to January 2015, whereas refining and marketing companies decreased by approximately 18%.
EBITDA multiples were at five-year highs in June 2014 before declining precipitously in the second half of the year. We suggest that business owners within the energy sector and their advisors consider the data herein, the change in market conditions and market sentiment in the last nine months, and whether or not estate planning makes sense given their specific circumstances.
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