In this month’s miscellany of articles, “doom and gloom” largely holds sway, chased with the always-bittersweet implications of acquisition news.
The Corn-Fed Albatross Called Ethanol
In this excerpt from the Jan. 6 edition of The Wall Street Journal, Institute for Policy Intervention’s Dr. Merrill Matthews pointed out that if a presidential candidate opposed to ethanol subsidies can top the polls in Iowa, it’s probably time to eliminate Renewable Fuel Standard.
He wrote: “In the past two presidential-primary seasons, candidates crisscrossing Iowa before the caucuses would pay obeisance to corn ethanol and its compulsory use in gasoline. Yet in the current campaign, Sen. Ted Cruz reliably sits atop the Iowa polls even though he scoffs at the Renewable Fuel Standard passed by Congress in 2005 and expanded in 2007.
Maybe even Iowans are having second thoughts about a law that has been a boon to corn growers but hardly anyone else. Before long, it may be politically safe to take a wise step and eliminate the Renewable Fuel Standard (RFS). This would immediately and dramatically increase the demand for oil, help stabilize energy markets, boost the economy—and likely reduce carbon-dioxide emissions.
The RFS requires gasoline to contain a specified level of ethanol—renewable biofuels mostly from corn, but increasingly from other plant and animal substances. The law also requires the Environmental Protection Agency to periodically increase the amount of ethanol that must be used. But raising the amount of ethanol in gasoline past 10 percent could harm millions of car engines.
The EPA recently decided to increase the total amount of ethanol used from 11.62 billion gallons in 2014 to 18.11 billion gallons for 2016—a decision that made few people happy.
Ethanol producers are angry that the EPA succumbed to economic reality by not raising the requirement as high as they expected. But many environmentalists aren’t happy either, having come to realize that ethanol is an environmental problem, not a solution.
When the RFS was enacted, lawmakers believed that adding ethanol to the national gasoline supply would reduce reliance on oil imports. Today, ethanol’s downsides have become clear.
First, it increases the cost of driving. Current ethanol blends provide fewer miles per gallon, so drivers pay more to travel the same distance. According to the Institute for Energy Research, American drivers have paid an additional $83 billion since 2007 because of the RFS.
Second, ethanol adds more carbon dioxide to the atmosphere than it eliminates by replacing fossil fuels. The Environmental Working Group says that, “corn ethanol is an environmental disaster.” The group explains: “The mandate to blend ethanol into gasoline has driven farmers to plow up land to plant corn—40 percent of the corn now grown in the United States is used to make ethanol. When farmers plow up grasslands and wetlands to grow corn, they release the carbon stored in the soil, contributing to climate-warming carbon emissions.” And then there is the carbon emitted in harvesting, transporting and processing the corn into ethanol.
The Congressional Budget Office notes that, “available evidence suggests that replacing gasoline with corn ethanol has only limited potential for reducing emissions (and some studies indicate that it could increase emissions).”
Finally, the United States no longer needs renewable fuels to reduce its dependence on energy from foreign sources. Thanks to expansion in the oil and gas industry, the United States has outdistanced Russia and Saudi Arabia to become the world’s top oil and natural gas producer. The United States could become energy independent in five years, according to the U.S. Energy Information Administration, but only if crude oil prices are high enough to keep American producers operating.
Replacing the 18 billion gallons of ethanol under the EPA’s 2016 RFS with roughly 18 billion gallons of gasoline would reduce the oil glut and improve the nation’s carbon footprint. Sounds like a candidate for bipartisan agreement.”
Merrill Matthews, Ph.D. is a resident scholar with the Institute for Policy Innovation (IPI), an independent, nonprofit public policy research organization based in Dallas. Matthews is available for interview by contacting Erin Humiston at (972) 874-5139, or email@example.com.
O&G Sees Hedging Roll Off
As oil prices continue to decline, North American exploration and production (E&P) companies have hedged just 15 percent of their total production volumes for 2016, including 14 percent of oil and 18 percent of natural gas, leaving the companies largely exposed to current depressed market prices, according to new analysis from IHS (NYSE: IHS), the leading global source of critical information and insight.
According to the IHS Energy Comparative Peer Group Analysis of North American E&Ps, production hedging for the group of 51 companies studied will fall even more significantly in 2017, when just 4 percent of total production will be hedged, including only 2 percent of oil and 7 percent of gas, IHS said.
“Companies hedge their production to provide a level of protection against oil and gas price fluctuations, and in 2016 and 2017, we see a significant decline in hedging protections, which means more companies are exposed to the current depressed prices and market conditions,” said Paul O’Donnell, principal analyst at IHS Energy and author of the hedging analysis. “For most companies in the sector, 2016 is going to be another very tough year, as plunging revenues lead to balance sheet deterioration, and financial pressures mount.”
The small U.S. E&Ps have the highest level of hedging protections, the IHS report said, with 47 percent of their oil production hedged at $74.31 per barrel, and 46 percent of gas production hedged at $3.43 per thousand cubic feet (MCF), compared with 77 percent of oil at $83.15 per barrel, and 58 percent of gas at $3.67 per MCF in fourth-quarter 2015. Within this group, IHS said, Comstock Resources, Approach Resources, and Stone Energy are among the most at-risk of financial stress, owing to high debt and little hedging.
The midsize U.S. E&Ps have hedged 43 percent of oil production at $60.54 per barrel and 26 percent of gas production at $3.34 per MCF. High-debt companies with little hedging include Ultra Petroleum and SandRidge Energy. (Reuters reported Jan. 25 that SandRidge Energy is exploring debt restructuring options, according to people familiar with the matter, as the heavily indebted U.S. oil and gas exploration and production company struggles with the fallout from plunging energy prices.)
The large U.S. E&Ps have hedged just 6 percent of oil production at $53.85 per barrel and 16 percent of gas at $3.58 per MCF, making them the most exposed of the U.S. peer groups, IHS said. The majority of companies in this group are unhedged in 2016 and 2017, although their balance sheet strength is superior to that of their smaller counterparts, offering a bigger financial cushion.
The Canadian E&Ps have hedged just 9 percent of oil at C$78.54 per barrel and C$3.87 per MCF, IHS said. Penn West and Canadian Natural Resources are the most exposed higher-debt companies.
API Outlines State of American Energy
API President and CEO Jack Gerard delivered the keynote address at API’s Sixth Annual State of American Energy event on Jan. 5, releasing the State of American Energy 2016 report and highlighting the energy issues that will shape America’s economic and political news this year.
“The United States begins this new year leading the world in energy production, economic growth, and lowering our greenhouse gas emissions—a trifecta unmatched by any other country today. The gains we’ve made and our ability to sustain them in the years to come are largely dependent on the energy policies we pursue.
“Fortunately, we know how to bring about America’s brighter energy future, which means lower costs for American consumers, a cleaner environment, and American energy leadership, because it is today’s reality. We call it the U.S. model.
“As the president’s last full year in office begins, we hope that he will take note of and help foster the U.S. model. We hope that he’ll see that overregulation—nearly 100 regulations and counting on the oil and natural gas industry—hinders rather than advances what he hopes to be one of his administration’s defining legacies: environmental improvement.
“”While the outcome of November’s elections is far from clear, it is certain that no matter who becomes the 45th president of the United States, he or she will lead a nation that is first in oil and natural gas production, first in refining ever-cleaner fuel and first in reducing greenhouse gas emissions.
“”Our goal is to keep the positive momentum of the last few years and to end the politicization of energy for petty partisan ends. We want to continue the national energy policy discussion and stay above the partisan fray, and immune from the misinformation campaign deployed by fervid critics of fossil fuels,” said Gerard.
Upstream M&A Deal Count Plunged in 2015
Despite an ample supply of oil and gas assets on the market due to low oil prices, the overall merger and acquisition (M&A) deal count in the upstream energy sector plunged in 2015 as the weakness and volatility in oil prices made it difficult for buyers and sellers to achieve consensus on value and outlook. These findings come from new analysis by IHS Inc. (NYSE: IHS), the leading global source of critical information and insight.
Despite the boost from Shell’s $85 billion agreement to take over BG Group, total transaction value for global upstream oil and gas M&A deals in 2015 declined 22 percent to $143 billion from $184 billion in 2014, when transaction value rose 30 percent year-over-year. In 2015, several large, unsolicited corporate takeover bids were rejected and asset deal value fell to a 10-year low.
“Unstable oil prices caused outlook uncertainty in 2015, and this lack of stability, a key ingredient for buyers and sellers to reach consensus, caused fewer deals to be reached,” said Christopher Sheehan, director of energy M&A research at IHS, and lead author of the IHS Energy Global Upstream M & A Review. “There continues to be a wide disconnect between potential acquirers and sellers regarding valuations of the huge supply of assets on the market that vary in quality. At the same time, corporate takeover targets that suffered severe share price declines are reluctant to sell at modest current premiums in a weak market.”
“During 2015, traditional funding avenues remained generally available for E&Ps, lessening the pressure to consolidate,” Sheehan said. “However, we believe the likelihood for wider consolidation in the oil and gas industry will increase in 2016 as producers face further financial pain and will have more constrained financing options due to persistently weak oil prices.”
The softness in deal activity during the final two months of 2014 carried over into early 2015, the IHS report noted, and while oil prices and deal flow briefly rebounded in the spring, volatile and declining crude prices during the remainder of 2015 kept many potential buyers and sellers on the sidelines.
According to IHS Energy M&A research, worldwide deal count (which includes both asset deals and corporate deals) fell by nearly 50 percent in 2015 to the lowest level since 2001. Asset deals represented 80 percent of total deals, but the number of both worldwide asset and corporate transactions fell steeply. Corporate deal count plunged to a 20-year low, IHS noted.
A significant development in 2015 was the emergence of more than $60 billion in unsolicited corporate takeover bids by larger, financially-stable companies that targeted more distressed peers. The rejection of these bids, compounded by low asset-deal value, dampened total transaction value. Other than Shell’s agreement to acquire BG, there were no corporate takeovers exceeding $5 billion. In 2015, there were fewer than 10 asset deals valued at greater than $1 billion, following more than 30 annually during each of the previous two years.
For the second consecutive year, Asian national oil companies (NOCs) reined in overseas acquisition spending, and their global market share for upstream oil and gas acquisitions in 2015 declined to the lowest level since 2007. Chinese NOCs, continuing to undergo internal restructuring, spent less than $5 billion on acquisitions for the second straight year. Meanwhile, financial buyers, led by private equity firms, spent more than $25 billion investing in acquisitions, joint ventures, and funding private exploration and production (E&P) companies.
Global spending on unconventional assets plunged to less than $30 billion in 2015 after topping more than $75 billion in 2014, causing its market share of total worldwide upstream deal value to decline from 40 percent to 20 percent in 2015. North America continued to be the dominant target for transactions of unconventional resources, led by deals in the United tates.
North America: 60% of Worldwide Deal Value
IHS found that North America, excluding the weighting of the globally-diversified Shell/BG deal, accounted for approximately 60 percent of worldwide upstream deal value for the second consecutive year. Canada’s market share fell slightly from 13 percent to 11 percent, with only one deal exceeding $1 billion. Oil sands deal activity continued to be relatively dormant for the third straight year. Excluding Shell’s agreement to purchase BG Group, the United States represented 50 percent of global upstream oil and gas transaction value in 2015, similar to its share in 2014. The U.S. accounted for slightly more than half the number of total worldwide deals, above its historical average. However, only three of the top 10 largest transactions in 2015 were in the U.S., versus five the prior year.
Total U.S.. transaction value declined by 60 percent—from almost $90 billion in 2014—to $35 billion in 2015. For the second consecutive year, four of the top five largest United. StatesS. deals targeted unconventional resources, led by Noble Energy’s $3.8 billion acquisition of Rosetta Resources. However, United States corporate transaction value fell by more than 55 percent and United States asset deal value declined by 70 percent to the lowest total since 2009.
“The continued weakness in commodity prices is having a dramatic impact on valuations in the asset transaction market,” Sheehan said. “Deal pricing for U.S. oil and liquids proved reserve assets fell extremely sharply in 2015. U.S. gas asset deal pricing also declined steeply. Asset deal market pricing in the Utates. for both commodities plummeted to 10-year lows.”
Largest Global Deals Were Outside North America
Transactions outside North America dominated the top 10 largest global deals in 2015, after accounting for slightly less than half of the top 10 deals in 2014. The largest transactions featured globally-diversified deal activity in the Russia and Caspian, Asia-Pacific, Africa and Middle East and Europe. When including the Shell/BG deal, North America accounted for only 30 percent of global deal value.
“Our IHS analysis of upstream companies indicates that oil and gas producers with heavy debt burdens and hedges rolling off in 2016 will become increasingly vulnerable,” Sheehan said. “They will either have to dispose of prized assets, face serious restructuring — including the potential for bankruptcy — or become takeover targets in 2016,” Sheehan said. “The volume of global assets for sale and companies under financial duress are surging as oil prices continue to be subdued. Our IHS Energy Significant Energy Assets on the Market (SEAM) database is tracking more than $200 billion of oil and gas property and corporate opportunities that have the potential to transform the portfolios of stronger players.”
EnLink Acquires Tall Oak Midstream
The EnLink Midstream companies, EnLink Midstream Partners, LP (NYSE:ENLK) (the “Partnership”) and EnLink Midstream, LLC (NYSE:ENLC) (the “General Partner”) (together “EnLink”) announced Jan. 7 that a subsidiary of the Partnership and the General Partner completed its previously announced acquisition of certain subsidiaries of Tall Oak Midstream, LLC for $1.55 billion, subject to certain adjustments.
“The acquisition of Tall Oak is consistent with our growth strategy and will provide additional expansion opportunities in one of the best plays in the nation, the liquids-rich STACK play,” said Barry E. Davis, EnLink Midstream president and CEO. “This region offers some of the best drilling economics in North America with low breakeven prices and active producer customers who are committed to growing in the area.
“Additionally, the Tall Oak assets are anchored by long-term, fee-based contracts, with Devon being the largest customer on the system due to its acquired Felix acreage. We remain committed to maintaining our strong balance sheet and investment-grade credit profile while also providing long-term value to our unit holders by growing our business prudently and profitably.”
Tall Oak’s gathering, processing and compression assets are located in the core of the STACK and Central Northern Oklahoma Woodford (“CNOW”) plays, and serve as an excellent complement to EnLink’s existing position in the Cana-Woodford. Tall Oak’s key contracts are primarily fee-based with substantial acreage dedications and have a remaining weighted-average term of approximately 15 years. Additionally Devon will provide EnLink with five-year minimum volume commitments for gathering and processing on the dedicated Felix acreage.
Keane Acquires U.S. Assets of Trican
Keane Group, a privately-held United States-based well-completion services company, has agreed to acquire the majority of Canada-based Trican Well Service Ltd.’s (TSX: TCW) U.S. assets for total consideration of $247 million, comprised of $200 million in cash plus a minority interest stake in Keane Group. With the acquisition, Keane will triple its frac capacity, acquire access to proprietary technology, add applied engineering capabilities, and further expand the Company’s service offerings and geographic reach in the United States.
“This acquisition will significantly strengthen Keane’s position as a leader in the completion services business across all key U.S. basins,” said James Stewart, Keane Group chairman and CEO. “With our expanded capabilities, Keane Group will have a significantly greater scale that will enable us to provide all customers cost-effective completion services that will maximize the return on their assets in the current low-commodity-price environment. With a strong balance sheet and scalable platform positioned for continued growth, Keane looks forward to playing an active role in further industry consolidation.”
With this transaction, Keane will acquire the majority of Trican’s U.S. assets, including equipment, key employees, and its engineering capabilities.
With these additional resources, Keane will:
Grow from 300,000 frac horsepower to over 950,000 available for dispatch.
Acquire access to proprietary technology, engineering capability and new services lines including cementing, coiled-tubing, nitrogen pumping, and acidizing capabilities.
Expand into additional basins in Texas and the Mid-con, while deepening Keane’s existing presence in the Permian, Bakken, and Marcellus/Utica basins.
“We are pleased to add to our company the capabilities of one of the leaders in the U.S. oil and natural gas completion services industry,” Stewart continued. “Working with the Trican team, we will ensure uninterrupted service to Trican U.S.’s and Keane Group’s existing customers, and looking forward, will be able to provide them and our future customers with expanded offerings. What will not change is Keane Group’s unrelenting focus on health, safety, environmentally responsible practices, and delivering operationally efficient solutions to our customers.”
The transaction is expected to close before mid-March 2016, following the completion of customary approvals.