A good place to start is back in early summer, when everything in the garden looked rosy. Simmons, as a global firm, had just completed its best year ever (our fiscal year ends in June), with both the corporate finance and securities businesses recording record revenues.
Our Aberdeen office also had its best year ever by closing 28 transactions with an aggregate value of around $4.6billion.
Over that same 12-month period, Brent crude prices doubled from about $70 to $150, and valuations of the main listed oilfield service companies rose by more than 30%, on average.
Shareholders in Abbot and Expro were particularly well served by the surge in company valuations when First Reserve acquired the former group and Candover the latter.
Abbot’s share price went from £2.70 in June, 2007, to £3.90 when it was sold in March, 2008. Expro’s share price went from £9.80 in June, 2007, to £16.15 in July, 2008, when it was eventually sold.
While both Alasdair Locke (Abbot chairman) and Graeme Coutts (CEO of Expro) are to be applauded for generating these remarkable returns for their shareholders, Coutts deserves a special award for his impeccable timing.
No sooner than he sold Expro to Candover on July 1, crude prices began to slide and the universe of publicly traded oil service stocks slid downwards in lock step.
Over the three months that followed, crude prices fell 30% as concern grew about the reduction in demand for oil that was likely to occur as a consequence of high oil prices.
Wood Group and Petrofac, which had only just made it into the FTSE 100, saw their shares prices slump by more than 20% by mid-September despite reporting year-on-year earnings growth of more than a third in their summer interim statements.
Over the last few weeks, a new, and potentially much bigger, problem has emerged as the effects of the credit crisis begin to bite. At the start of the summer, nobody could have predicted that, in the space of just a few weeks, Lehman Brothers would go bust, Merrill Lynch would disappear into Bank of America or that HBOS would hold up a white flag and become part of Lloyds TSB.
Investor confidence in our banks has evaporated, as has the confidence of depositors. The amount of Government money required to keep the banking system going seems to be growing exponentially, and one has to wonder and worry how it will all be resolved.
In the meantime, crude prices have fallen heavily, though they appear to have flattened lately around $100 per barrel. The prices of publicly traded energy stocks remain very subdued relative to historic valuation metrics. All of this seems a far cry from the happier times of the early summer.
I suppose we have to believe that the credit crisis will eventually be solved if governments throw enough money at the problem, but my guess is that it will take a very long time to get back to a world where credit is easy to come by.
In the meantime, this may have a paralysing effect on the global economy, reduce demand for energy, and thus drive oil prices down. That being the case, it seems likely that Opec will defend prices by cutting production, although it is hard to guess the price at which it will draw a line in the sand. Although its recent quota cut was linked with defending the $100 barrel line, my personal view is that prices could soften further. Having said that, it is hard to predict to what extent (if any) demand for oil&gas in the developed world will decline, and it is easier to be confident that demand growth in the developing world will remain positive, but it will slow.
Even in an environment of more subdued demand growth, I sense that supply problems will remain sufficiently acute that exploration and production activity will continue apace as it is unrealistic to suppose that five years of increased spending in a highly inflated cost environment could compensate for more than 20 years of under-investment.
As far as the banks are concerned, energy is one of the few areas that they feel positive about. Nevertheless, as far as financing transactions is concerned, debt is looking more expensive now than at the start of the year and it is proving to be a longer and more difficult process to gain access to it. That will inevitably have a negative impact on company valuations.
However, there are likely to be some beneficiaries of this chaos – particularly those who are prepared to take a long-term view and those who have cash reserves.
Fortunately, Simmons is well connected to the private-equity community and sovereign wealth funds that are particularly well positioned to take advantage of the opportunities arising from liquidity problems.
In terms of transaction activity, my guess is that the remainder of 2008 will be very subdued until the banks make progress in sorting themselves out. Hopefully, confidence levels will return in 2009, but I would expect a return to the old days where banks try to improve their returns by lifting arrangement fees and rates and reduce risk by lowering debt multiples rather than by taking equity risk.
Absent a complete economic meltdown, the outlook for the energy sector remains positive. I just hope that there are no knee-jerk reactions which delay investments in new oil and gas fields, new oilfield technology or renewable projects as it is safer to presume that, whenever normality returns, energy security and peak oil will be back at the top of the agenda.