Event Summary: Latin Finance Panel Features Oil and Gas Experts
In December 2020, restructuring and turnaround expert Elena Ippolitova contributed to a panel discussion hosted virtually by Latin Finance. The panelists showcased collective expertise related to restructuring and business trends affecting the Latin American region.
Discussion centered on the 2021 outlook for the oil and gas sector. The experts discussed investment opportunities and examined companies facing notable challenges in recent months. The group also exchanged ideas for potential strategic priorities, given the likely emphasis on renewable energy in the year ahead and the expected pace of pandemic-related recovery.
Recap:
Post-pandemic, M&A activity is poised to continue in the oil and gas sector as an efficient way to increase scale, lower overhead, and pursue profitability.
Panel discussion recap
While the oil and gas sector has been significantly impacted by the COVID-19 pandemic, it has long faced challenges due to the slowdown in global demand and elevated stockpiles.
In 2020, over 40 oil and gas companies filed for bankruptcy. While the oil and gas market correction in 2016 was primarily caused by oversupply, this year, the stress was largely a result of demand reduction. In cases where significant deleveraging had already occurred, the next logical step is to sell a struggling company (either in or out of court). Valuations, however, remain depressed, and there is virtually no market for these assets. Sale processes do not garner strong bids, putting debt holders in an unfortunate situation: to see debt converted into equity or another party take the keys.
This dynamic creates an opening for opportunistic investors. Most institutional investors or lenders have no interest in taking the keys or owning and operating these kinds of assets, so they may be willing to sell the debt or the asset at a discount. There is likely to be a large amount of debt trading hands in the coming months, setting the table for restructurings next year. Consolidation and M&A activity will be paramount. For the companies that have already deleveraged, cost savings must go beyond the debt line and merely cutting interest expenses. Asset owners may seek to eliminate overhead and other superfluous expenses in order to make the asset holdable over a sustained period while the market recovers.
Petroperú, a national fully integrated energy provider, is just one example of a company that experienced a difficult 2020. Its work on the Talara refinery upgrade was delayed because of the pandemic. Despite this delay, the company still saw healthy appetite from investors eager to provide financing to complete the project. The mandate of Petroperú is to secure reliable supply of fuel in many parts of the country.
Unlike Chile, Peru has not made as big of a push into the renewable energy sectors. Instead, Peru seeks to diversify its energy supply sources to compete among solar, hydro, wind, and natural gas energy power plants. Petroperú has been producing natural gas from the Camisea field, and almost 40% of the company’s revenue comes from natural gas. In Latin America, to phase out internal combustion engine cars, government mandates are not as aggressive as those in the European Union. As a result, the Latin American region will have a slower transition to electric vehicles.
Looking ahead, the oil and gas sector will likely see continued deleveraging alongside a slow recovery. Robust investment activity is likely in the renewable sector. As capital remains largely available, sound investment opportunities are poised to attract it. Oil and gas M&A activity will continue, as this is an efficient way to increase scale and lower overhead—a strategy that could be highly profitable in a post-pandemic world.