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Last Updated: April 11, 2016
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Green shoots of optimism are poking through the parched ground of the oil patch lately as industry focuses on the aftermath of a downturn they hope has troughed. But the US E&P sector that emerges from the latest carnage will be different as business models will be forced to change.

With crude oil hanging just shy of $40/b, industry-watchers say capital is still available to survivors of the downturn that are in relatively good financial shape. But lending criteria will be stricter as more will be asked of borrowers and production hedges may be more prevalent, they say.

Nearly $39 billion of private equity funds were raised in 2015, and on top of that there was a “substantial” amount of dry powder remaining from funds raised in 2014, Doug Reynolds, managing director and head of US business for Scotiabank, said at the Hart Energy Capital Conference last week.

“The majority of US production is owned by companies that are financially strong and there is new equity [raised] that will make them more so,” Reynolds said.

US E&P companies have recapitalized to the tune of nearly $11 billion in equity so far this year, compared to $8.6 billion in Q1 2015, he and others noted.

While many oil companies will likely disappear, victims of liquidations and takeovers, “we think for the guys that make it through, it will be somewhat of a golden era for them,” Reynolds said.

But they will have to be fiscally lean and efficient. For one thing, lenders may be skeptical of companies whose acreage is not top-tier or industry-proven as they have seen many bankruptcies in the current downturn

A recent count by law firm Haynes and Boone put oil industry bankruptcies north of 50.

Focus to stay onshore for faster returns

During the downturn, oil companies produced from their best, highest-return wells. They have also concentrated on land plays since the returns are quicker, unlike offshore projects, which can take as long as 10 years to come onstream.

The shift to onshore production is expected to continue due to the lower costs and speedier returns available.

And while well costs have come down both onshore and offshore due to concessions from oilfield service companies, offshore wells have not experienced the astounding efficiency leaps that have been such a large part of the shale revolution onshore and allowed those operators to survive sub-$50/b oil.

Costly or lengthy projects in the US will be “challenged” going forward, Wil VanLoh, CEO of private equity firm Quantum Energy Partners, said at the Hart gathering.

The downturn will refocus public oil companies on making money more quickly rather than growing production and reserves. This will “materially” alter or even eliminate certain business models, such as long-cycle projects in deepwater and international arenas, or high-cost projects in the Gulf of Mexico, oil sands, upstream master limited partnerships and the bottom 50% of resource plays, VanLoh said.

Only the exceptional of these projects will be moved forward.

In addition, the private equity model of funding may be changed post-recovery, VanLoh said.

“The model where you lease land, drill a few wells and flip [the developed assets] to a public company is likely a thing of the past,” he said.

“Public companies have much less money to buy this stuff now, and they have a lot of acreage of their own,” he added. “PE-backed companies will have to more fully develop their assets, requiring more money and more time, so quick flips won’t be as prevalent.”

Going forward, debt capital will be harder to get and cost more, while acquisitions will require more equity and that should drive down the prices of assets.

“Expect more erratic prices, capital markets, and [mergers, acquisitions and divestiture] activity,” VanLoh added.

Also, hedging production to protect revenues will likely figure more into the equation. “Public and private companies will have to hedge more for a period of time to get deals done,” he said.

Lenders may also be under more stringent requirements to determine what a given company’s borrowing base should be with everything from interest coverage to debt asset ratios getting a fresh look, analysts said.

Borrowers will also have more responsibility. They will need to prove their price forecasts, and the viability of their budgets, and how they will achieve positive cash flow, Deborah Byers, US oil and gas leader for EY, formerly known as Ernst & Young, said.

“There will be a lot more rigor around forecasts that are presented to support borrowing bases,” Byers said.

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Oil and gas sector is one of the most lucrative sectors for job seekers from industries all over the world. It offers great salaries and benefits packages and an opportunity to travel and work overseas. Due to its high demand, scammers are preying on the vulnerable oil and gas workers. To ensure you don’t fall prey to their mischievous tactics, we would recommend reading our guideline below:

How does scamming occur? 

The scammer poses as an employer or recruiter of an oil and gas company or he may claim to be an employee or recruiter for a job consultancy firm catering to the oil and gas industry. They offer irresistible employment opportunities and often demand money in advance to conduct further processes. Money is often demanded on the pretext of work visas, travel expenses, background or credit checks that the job requires.

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To extract money: On the pretext of getting you a job in the energy sector employing any of the tactics mentioned above

For identity theft: scammers look for valid identity of people and ask for confidential personal details including bank details to commit fraud through your name or to withdraw money from your account.

Whatever be their modus operandi, their goal is to either separate you from your cash or accomplish an identity theft. The bigger problem is, the scammers are getting better at their game and coming up with innovative ideas to lure innocent job seekers. In oil and gas industry, the scammers are targeting the job seekers from overseas, immigrants or contractors as they feel it is easier to attract them on the pretext of work permits, high salaries, paid travel, better lifestyle in the first world countries.

How to spot a job scam and keep yourself secure?

 There is always a difference between real and fake, all you need to do is be watchful to notice the underlying discrepancies. There is a pattern that scammers usually follows, which is discussed below. Make sure you watch out for these red flags when you receive any job offer next time:

Free email provider - No legitimate hiring agency or company will use the services of free email provider like Gmail, Hotmail, or Yahoo. So, if you are receiving an email or have been requested to share your details on emails that use free email services, then be extremely cautious. The scammers try to trick the job seekers by using an email address that looks authentic for instance: [email protected]. It is important to notice here that the ‘xyz’ part of the email ID is usually a gmail, yahoo, etc. which is a free email address. A legitimate job provider would never use.

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Unknown source - There are countries who have strict spam rules and until you subscribe or give consent to the company, they cannot send you emails. So, if you receive an email from a company you haven’t contacted or have not applied for jobs, then be cautious it might be a scam.

The principle on which scammers operate is “Too good to be true”.  Don’t entertain any job offer that offers a position, you are not qualified for or offers a salary which is unrealistically high. In the oil and gas sector, be careful not to reveal your passport/work visa details to the scammer. Remember, if you find anything which is way beyond the realistic expectations, then trust your instincts and drop the offer and do not respond.

See our infographic below for a quick summarized glance -

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