UBS Expands Its U.S. Oil Banking Team To Make The Most Of Low Oil Price Environment

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UBS (NYSE:UBS) recently poached a team of 15 oil and gas investment bankers from Bank of Montreal, in a move that aims to strengthen the Swiss banking giant’s presence in the North American energy banking market. [1] The team – based out of Houston – specializes in the complex engineering and technical research aspect that goes behind valuing oil and gas reserves.

With oil prices plummeting over recent months, earnings figures across the energy sector have taken a significant hit – forcing oil and gas companies to explore ways to raise cash for day-to-day operations externally. UBS is clearly looking to tap into this demand by leveraging the newly added team, as it stands to gain from the existing situation on two fronts. Firstly, the team will beef up the services offered by UBS’s reserve-based lending unit in Dallas. And secondly, it will also make the bank’s M&A advisory desk more competitive with other players in the region’s energy M&A industry. Notably, Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS) have maintained a similar back-end team for a while now.

We maintain a $20 price estimate for UBS, which is about 10% ahead of the current market price.

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The sharp decline in crude oil prices over recent months has notably changed the dynamics of the energy industry. The resulting pressure on revenues has eaten into cash reserves of oil and gas companies – forcing them to raise cash to cover routine operating expenses. The precarious situation this has put many of the smaller firms in the sector also makes them potential acquisition targets in the near future – setting the stage for a jump in M&A activity across the industry.

With opportunities opening up on two fronts for investment banks, it is only natural to see them step up their offerings. That is what UBS has sought to do by adding the new team of oil and gas reserve valuation experts to its payroll in the U.S. Most of the small and large investment banking firms focused on the energy sector have such teams in place, as they provide a competitive edge in the industry while also being able to better cater to the needs of their clients.

In the case of UBS, the team will be able to directly assist the bank’s reserve-based lending business in Dallas. The unit, which hands out loans to energy companies based on the estimated value of the reserves they hold, should be able to leverage the new team’s expertise to make quicker and more accurate decisions about making loans to potential customers in the oil and gas industry. This should have a positive impact on UBS’s outstanding loan portfolio in the future, captured in the chart below.

At the same time, UBS’s global M&A advisory desk should also benefit from this move as the new team should prove an invaluable asset to position the bank’s services to potential clients in energy sector. While the team has a very specific focus, it should help differentiate UBS in the highly competitive investment banking industry as far as oil and gas offerings are concerned. Coupled with the expected increase in M&A activity in the industry over coming months, this puts UBS in a strong position to gain some market share from incumbents like Citigroup and Morgan Stanley.

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Notes:
  1. Exclusive: UBS poaches Bank of Montreal oil banking team, Reuters, Mar 10 2015 []