Paul Beckwith: The Great Shale Conspiracy Debunked
I have over 25 years experience of the investment banking industry and of investment bankers.
A central argument of this piece of “research” is that the decline in gas prices was driven by a conspiracy of the whole investment banking community to fool shale gas drillers to overproduce so that the bankers could then reap the benefits of M&A fees in the ensuing rationalization.
Allow me to make a few observations.
In the realm of well established enterprises, it would be a rare company indeed that would make operational decisions based on the advice of an investment banker. The role of merger and acquisition bankers in the formulation of major strategic decisions, such as takeovers for example, is overplayed in the public imagination. Large companies hire M&A advisors for the following reasons 1) to help CEO’s rationalize to their boards the decisions they have already made by providing independent analysis, 2) to provide financial analysis of merger/takeover terms and help tweak those terms, 3) to provide tactical advice on the details of complex transactions, 4) to act as a buffer between the principals or to provide negotiating leverage. Often the most important role of an M&A bank is to provide access to capital. It is under-appreciated outside the world of Investment Banking that the prestige title of “M&A advisor” on a deal is often simply part of the reward package for the provision, underwriting and arrangement of capital by the advisor’s firm. In other words the company hires the bank for its money and “throws it a bone” in the form of an M&A title and a small fee on the deal without expecting particularly significant M&A advice.
In a dynamic new industry, like drilling for tight oil and gas, there will be lots of new and entrepreneurial businesses that seek to enter. These types of enterprises generally do have tighter relationships with their bankers and will look to them for ideas, strategic analysis, and help with execution to drive growth and access capital. Why, because they are very human resource constrained and banks can provide valuable expertise. But let us remember what is really happening here. A new technology has arisen from almost nowhere in a few short years. This technology opens up a whole continent (and soon globe) to a new form of energy development. Hundreds and thousands of new enterprises are established by entrepreneurs in a mad scramble exploit this opportunity, along with the services and supplies needed. The market becomes oversupplied, output prices crash and consolidation sets in. Only a small fraction of the entrepreneurs and their backers will end up as winners. Sure, the banks may make some money on the way through, but they may also lose a lot to the extent they have risked capital as lenders of credit or underwriters of debt and equity products. The only sure winners in this game are the consumers who have new products, new sources and lower prices. No different that the history of the auto industry, radio and TV industries, aircraft, computers, communication and internet retailers and many others besides.
Will a few bankers act less than honorably in the creation of this new industry – no doubt. Will bankers play a critical role in creating the channels and mechanisms for the formation of vast quantities of capital to allow the industry to grow – absolutely. Will money be redistributed from the gullible and stupid to the well informed and perceptive in the process – always happens (look at the recent experience in “green technologies”). WIll we all be better off with lower energy prices and more security of supply – yes of course.
It’s the free market at work.