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Why the energy sector downturn is more pronounced now than in prior cycles

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Yahoo Finance's Julie Hyman, Myles Udland and Brian Sozzi talk about the outlook for oil in 2021 with Grant Thornton's Bryan Benoit.

Video Transcript

JULIE HYMAN: Oil prices are on the rides today, although, of course it had been a tough year for oil. Oil trading around $48 a barrel at the moment. We had that brief flirtation with negative oil prices because of a quirk in trading earlier in the year. Let's talk about the year that was and what is to come with Bryon Benoit. He is Grant Thornton US National Managing Partner in Energy. Bryan, thanks for joining us.

You know, there was always a lot of discussion about peak oil in terms of oil supply. Maybe now that's switching to peak oil in terms of demand. Where do you think we are right now on that continuum?

BRYON BENOIT: Well, peak oil in terms of demand really hasn't happened yet. I think the general consensus is that that may not actually occur until possibly 2030. Seems like a long way off, but really not so much, just perhaps a decade or less away. So peak demand is still yet to come.

On the supply side, a different story. And of course, you know, it takes both to actually drive price. You mentioned $48 a barrel. So that's kind of what's going on today.

BRIAN SOZZI: Bryan, we're talking to a good number of economists on Wall Street. And they're suggesting something just short of an economic boom next year, as more people get the vaccine. They go out there and fly. They're out there spending on services. They're driving the car. Transit picks back up. Where-- where are oil prices in that boom scenario?

BRYON BENOIT: I think the oil industry will recover significantly in 2021. I think prices [INAUDIBLE] are higher, you know. But not every sector's gonna be the same. But oil prices will essentially rise in the next 12 months, probably a Q2 or Q3 recovery, you know. I might go out on a limb and say we'll see $55, $60 a barrel by year end. It won't be a straight line ascent to that number. It'll be lumpy.

You know, we had an incredible spike to the downside in 2020. You know, if you look at the amount of capital spend that's been going on in this past year, it's been considerably less, some would say anemic by comparison to prior years. So it would logically follow that there's quite a significant possibility of a spike to the upside.

How high would that be? Nobody knows, really. But it'd be quite interesting if it happened in April, wouldn't it?

JULIE HYMAN: Yes, it would indeed. Just hang on one second, Bryan, because what we're seeing there-- people might be wondering why we're seeing video of this American Airlines plane take off. It's because it's the first Boeing 737 MAX that has taken off since the crisis that grounded the MAX, with questions about the operations of the plane. Of course, this speaks to demand for oil as well, as we see planes generally take back to there. But this plane, in particular, was the longest aircraft grounding in the nation's history, after those two deadly crashes. So that again, that's the first 737 MAX to take off.

Bryan, to come back to you and to what's happening with oil prices, what is the landscape going to look like in 2021, not just generally for oil? But I'm curious about the sort of geographic breakdown and the company breakdown in terms of sort of the traditional oil majors versus the newer shale players. What has changed this year that is then going to affect the dynamics next year?

BRYON BENOIT: Well, that's quite a few questions balled up into one here. But I'll see if I could do my best to try to tackle them. You know, I think that, you know, the economies reopening will drive a great deal of demand for energy. I mean, it's a fascinating industry. The science and the technology behind it is as substantial as any human endeavor in the history of man, including space exploration.

So-- but the-- the economics behind it are really quite-- quite simple. It's driven by human behavior. So as we see more US and global economies open, there's undoubtedly going to be a higher demand for energy. Right now there's a tremendous supply. So in the near term, you look for some really fascinatingly cheap prices of energy for consumers, whether that's price at the pump or airline tickets or anything else that you might be able to roll into that.

Now, I said earlier that, you know, each sector kind of recovers differently. And how energy plays into other industries, you know, that-- that doesn't look uniform either. And the general consensus is that when it comes to the airline industry, you know, it's slower to recover. And jet fuel prices, for example, are thought to be longer in coming in terms of the recovery, you know, there.

So you know, when you really think about it, I think there's a lot of optimism around economies reopening. There's more good news than bad news. We've had a little bit of sizzle come off the industry sector, the market, the price of oil there, here at the year-- end of the year. But a lot of that is really because of, you know, just the shut down in the UK and-- and that economy, back to my comment earlier about, you know, human behavior and what people really long for, which is a reopening of economies across the globe.

You know, when you look at that, you have to kind of say, well, yeah, you know, there's-- there's another strain of the vaccine out there. That's on the bad news side of it. But overall, the expectation should be that there'll be more good news than bad. And we'll see, you know, a resurgence in demand for energy, and oil prices will follow that.

BRIAN SOZZI: When does the deal-- deal making and consolidation start happening in the oil space next year? Is it before a price recovery? Or some of these oilfield service companies or refiners, they need to see prices start to spike again?

BRYON BENOIT: Yeah, really good question. So you know, prices really kind of-- oil prices really kind of drive all the various sector economics. It's not a uniform situation. You know, energy service is different than refining, refining different than exploration and production. But when you have extreme drops in price, you have very wide gaps between what buyers want to pay and what sellers want to receive. And so deals don't happen.

I think as the oil prices recover, that has an impact on all the sectors. We're seeing some of that now at $48 a barrel. That is the price in which many different plays, many different geographic oil plays begin to start making sense again. Of course, it's more expensive to drill for and produce and deliver shale oil than it is conventional. So that's got a different dynamic about it.

But to your question and to the point, you know, as you see oil prices recover, buyers and sellers come together, and more deals likely to happen. There's going to be a great deal of distressed M&A. There's going to be a great deal of special purpose M&A. I'm hearing that from all the private equity firms that are prominent in the energy industry.

My clients-- I'm in Houston, so, you know, energy capital. You know, my clients are long oil. It's gonna be a big part of the energy picture for many years to come. Of course, many of the things that are happening right now also make way for the future, which is undoubtedly going to be in renewables. So you know, you could-- I could take this conversation further into, you know, European majors versus US majors and strategy, if you like. But essentially that's where we're at in terms of M&A for the near term.

JULIE HYMAN: Right. Well, we'll have to save that part of the conversation for another time, Bryan. But thanks for being here today. Bryan Benoit, Grant Thornton US National Managing Partner of Energy, appreciate your time. Thank you.