Fulcrum Market Update: September 2019




Traditional Sources of Capital Declining for Energy

The oil and gas industry is capital intensive and has long relied on public equity and high yield issuances, borrowing bases from their bank groups, and support from private equity backers to support their operations. Since the oil price crash of 2014, capital has become increasingly difficult to come by for oil and gas companies and has driven companies to look at their operations and ability to generate free cash flow.
Public equity saw a rapid and steep decline in the energy space. After hitting a peak in 2016, the dollar value of public equity issuances (initial public offerings and follow on equity offerings) fell 97% as appetite for energy industry public equity dried up. With crude oil and natural gas prices well below levels seen earlier in the decade, investors have been more selective in putting money to work inside the industry.
With the loss of interest from equity markets has come a similar drop in high yield issuances. Over the same period in which equity issuances fell 97%, high yield issuances fell 85% leading to a ten-year valuation trough. The withdrawal of high yield funds has led to inactive secondary markets and substantially higher spreads.


These changes have also led to compression of EBITDA multiples for oil and gas companies even as the industry learns to live within current oil prices. The chart below shows total E&P EBITDA growing from 2016, but even as companies generate more earnings, their enterprise value to EBITDA multiples have sunk well below levels seen in 2016.

Low multiples compound a company’s inability  to raise new capital, and creates an opportunitiy for investment into the space. With historically low value being placed on assets in the oil and gas space, there is a great deal of upside available to investors who are able to acquire quality assets from companies that are having to allocate their finite capital to only select portion of their asset base.

Capital constraints across the industry provide generational opportunity for targeted investment. Companies are having to think creatively to raise capital for their operations have changed over the last three years, and the industry continues to find ways to fund operations. In this market private equity firms like Fulcrum Energy Capital Funds are uniquely positioned to continue to find new ways to provide returns for their limited partners.

To learn more about how the oil and gas industry is adapting, and about how Fulcrum is building value in this current environment, please review our market update.