In this month’s roundup of news and views, we share reports that remind us that this Basin is forever in a state of flux. These are the full versions of the “Drilling Deeper” news items that appeared as abbreviated versions in the print edition of PB Oil and Gas Magazine’s December 2019 issue.
Gator Expands to Midland
Gator Technologies, a provider of downhole tools, has expanded its operations in Midland, Texas, and Broussard, La. The new facilities will provide purpose-built space to support Gator’s bottom hole assembly tool rental, repair and manufacturing capabilities.
Marc LeBlanc, president and COO, Gator, said, “Adding these new facilities will allow us to better serve our customers located in the Permian Basin and Gulf Coast regions. By operating from these strategic bases, we will reduce transportation costs and delivery times and respond immediately to our customers’ needs.”
Chris Miller, business development manager, Gator, commented, “Our team continues to deliver a unique perspective and expertise to the downhole rental tool business. We are pleased to deliver on the promise we made to our customers: to continue to support their business, bringing quality tools and exceptional service to all geographic areas where our services are required.”
The new Midland facility is located at 9910 W County Rd 157, Midland, TX 79706, and the Broussard facility is located at 128 Thruway Parkway, Broussard, LA 70518.
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Gravity Acquires On Point’s Business
On Point Oilfield Holdings LLC, a portfolio company of White Deer Energy, LP, announced Nov. 7 that is has recently executed a definitive agreement to sell its industry leading Permian Basin produced water midstream business to Gravity. Since its inception in October 2016, On Point has grown into the largest operator of produced water disposal by volumes in the Midland Basin.
On Point was able to meet the growing demand for reliable water infrastructure from its long-term contracted E&P customers by pioneering the development of new deep Ellenberger disposal wells and pipelines in certain undeveloped areas of the Howard, Martin, and Midland counties faster than any other company in the Permian. On Point’s current system includes 17 active disposal wells with 432,500 barrels per day of permitted capacity connected to over 130 miles of pipeline infrastructure, as well as the rights to develop up to 20 new deep Ellenberger disposal permits for an additional 425,000 barrels per day of capacity to grow its systems and meet future market demand.
Gravity, a portfolio company of Clearlake Capital Group, LP, plans to integrate the On Point system with its existing water infrastructure platform to create what it says will be the largest produced water gathering and disposal company in the Midland Basin.
Upon consummation of the acquisition, On Point co-founder and CEO Trace Hight has agreed to join Gravity as its Chief Commercial Officer of Water Infrastructure. On Point’s co-founder and COO McCabe Turner and Vice President of Operations Mike Christensen have also agreed to new contracts with Gravity to continue to grow the newly expanded water midstream platform.
“McCabe, Mike, and I are very excited about the acquisition by Gravity and the opportunity to join a team focused on expanding our industry leading produced water midstream infrastructure in the core areas of Howard, Martin, and Midland counties,” said Trace Hight. “Our deep Ellenberger disposal wells and pipelines combined with Gravity’s water infrastructure expertise will help ensure we continue to satisfy market growth from our E&P customers and remain the market leader in the Midland Basin.”
Jim Meneely, Partner at White Deer, stated, “It was a pleasure to partner with Trace, McCabe, and the rest of the On Point management team. They successfully transitioned the company from a collection of truck-fed disposal wells to an industry leading pipeline-connected midstream system backed by valuable long-term contracts.”
On Point and White Deer were advised by Tudor, Pickering, Holt, and Co. and Locke Lord, LLP. Gravity was advised by Vinson and Elkins.
Produced water pipelines connected to On Point’s 70,000 bbls/d 846 SWD System in Howard County, TX.
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Equity Markets Closed to Energy
Enverus, a leading energy industry SaaS and data analytics company, released on Oct. 30 its Q3 2019 Capital Markets Review, which reports $40 billion raised via energy company debt offerings and $500 million in equity offerings. Bond issuances were actually up 198 percent from 2Q19 and 114 percent year-over-year, driven by Occidental’s $13 billion bond raise to support its Anadarko buy, plus offerings by midstream and utility companies. Meanwhile, equity raises were down 85 percent sequentially and 79 percent YOY.
“On the upstream side, a lack of access to capital for shale companies is becoming a defining story of 2019,” said Enverus Analyst Andrew Dittmar. “Their stock has significantly underperformed the broader market with the S&P E&P Index [XOP] down nearly 20 percent in 3Q19 versus flat performance for the S&P 500. That has eroded investor appetite for new issuances or IPOs and equity capital raised at these prices may be viewed as dilutive for existing shareholders.”
The bond market has also become largely closed off except for large issuers and those carrying an investment grade rating. Those best positioned have kept debt in check and have longer-dated maturities on their bonds, giving time for the market to hopefully recover before they need to refinance. Enverus experts tracked $12 billion of total energy bonds maturing by YE19 with ~$3 billion of that from upstream companies.
With struggles in the equity and bond market, credit facilities look to be an important source of liquidity for some companies. Enverus analysts found $47 billion in facilities launched or amended in 3Q19 across 56 agreements with $15 billion of upstream facilities that are set to expire between 2019–2021.
“Upstream companies may be relying on credit facilities at an increasing rate just as banks take a more conservative outlook in their borrowing base redeterminations,” added Dittmar. “Investors will also be closely watching how drawdowns are spent. They want any use of this credit to be a short-term plug, not another way to delay getting to positive free cash flow while adding leverage to the balance sheet.”
“Companies are working hard towards hitting free cash flow goals and we expect more to reach the inflection point as CapEx is held in check and companies focus on corporate-level efficiency and full-cycle returns. Ultimately, that is likely to be what restores investor confidence in the sector and helps energy companies find some traction on stock prices. However, it may take some additional time, and a tailwind from commodity prices wouldn’t hurt.”
Unfortunately, it is likely not all companies will be able to successfully transition to positive free cash flow from their current positioning, and with financing options sparse, Chapter 11 filings have also accelerated in the latest quarter. The number of bankruptcies filed in 3Q19 increased by 186 percent YOY, with a disclosed debt value of ~$15B. Upstream companies accounted for 16 of the 20 companies filing in 3Q19. Notable names entering restructuring include STACK-focused Alta Mesa, Eagle Ford-focused Sanchez Energy, and Permian-focused Halcon Resources.
“Companies have found themselves facing restructuring in a number of ways, but it usually boils down to overly aggressive CapEx to fund growth, wells substantially underperforming expectations, or some combination of the two,” added Dittmar. “However, companies are overall better prepared and more responsive to a changing market than past years, and we don’t expect to reach the level of filings from 2016, which peaked with around 40 upstream companies filing in 2Q16.”
“The majority of plans call for restructurings, with creditors taking control of the companies. White Star Petroleum (formerly one of the American Energy Partner companies) went the relatively rare route of selling its assets via a 363 process in bankruptcy. However, we could see additional liquidations if creditors decide they would rather get out what cash they can rather than own an E&P company.”
Outside of public markets, there is still some private capital being cautiously put to work. Enverus experts tracked 27 new management teams receiving commitments in 3Q19, including six upstream teams.
The largest disclosed upstream commitment went to WildFire Energy, with more than $1 billion committed from Warburg Pincus, Kayne Anderson, and its management team. WildFire is led by former WildHorse co-founder Anthony Bahr, while fellow WildHorse co-founder Jay Graham is leading KKR-sponsored Spur Energy Partners. Spur has been acting as a consolidator on the New Mexico Shelf, including a $925 million acquisition from Concho Resources. New upstream acquisitions by private capital have been focusing on buying assets with existing cash flow capable of organically funding development. Private money has also been deployed on midstream assets and select areas of the services sector that may be poised for further innovation and growth.
Full copies of the report are available upon request.
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Danos Provides Integrated Services
Danos has been awarded multiple contracts to fabricate, install, and automate compressor station components for a full-service midstream provider. The fabrication work, including separator skids and spool piping, will take place in Danos’ Larose, La., facility with field installation and hookup at five Permian-based sites located in Culberson County, Texas, and Eddy County, N.M.
“This is an exciting time for our company as we see a growing number of customers in the Permian, Eagle Ford, Delaware Basin, and Gulf of Mexico looking to Danos to provide integrated services solutions,” said owner Mark Danos. “We look forward to continuing to grow our partnerships with existing and new customers.” About 60 employees from Danos’ fabrication, construction, instrumentation, and electrical service lines are assigned to the project, which began in June and was expected to take approximately five months to complete. Danos has provided services in the Permian Basin for more than seven years, and the employee number in the area has grown to 500. The company recently moved into a newly construction office for its Permian headquarters in Midland, Texas.
A Danos separator skid stands mounted on an 18-wheel rig, ready for delivery.
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O&G Must Reinvent in Digital Age
Lux Research recently released a new, comprehensive study detailing the driving forces behind the reinvention of the global oil and gas industry for the rapidly evolving digital age. Specifically, Lux has identified four key factors contributing to changes aimed at maximizing operational efficiency across the industry: persistently volatile commodity prices; the high costs associated with workplace safety and the replacement of retiring skilled laborers; the shift toward a low-carbon economy and stricter emissions standards; and a global change in supply and demand coupled with unpredictable geopolitical factors.
Lux’s new report, “The Digital Transformation of Oil and Gas,” analyzes how industry leaders are adapting to meet these challenges, as well as what the evolution and maturation of this digital transformation means for the future of the industry as a whole. The report can be downloaded here: http://web.luxresearchinc.com/digital-transformation-oil-and-gas
“While many of the challenges faced by decision makers and stakeholders in the oil and gas industry aren’t new, the solutions and the technology behind them certainly are,” said Harshit Sharma, analyst at Lux Research and the lead author of the report. “We expect that in order to meet these challenges in the digital age and successfully scale global operations to meet a new stream of demand, we will see a new breed of ‘tech’ oil companies, the disruption of traditional service companies by major software giants, the creation of data marketplaces, and more operator-to-operator digital collaborations.”
Moreover, the four key challenges facing oil and gas leaders are inevitably leading toward a tech-focused future for an industry that has traditionally resisted massive or rapid change. According to Sharma, the future oil company is actually a tech company.
“The digital scale-up across the industry will eventually lead to a new era of companies that operate more like a traditional tech firm than an oil and gas company,” said Sharma.
“These companies will be leaders in innovation, resulting in faster, more agile product rollouts, deployments, and feedback loops, as well as an increased focus on cybersecurity and enterprise-wide data sharing.”
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Sable Merger with American Energy/Permian
Sable Permian Resources LLC announced on Oct. 17 the merger of assets with American Energy-Permian Basin LLC and the successful completion of AEPB’s previously announced comprehensive and consensual debt recapitalization transaction. Pursuant to the Recapitalization Transaction, AEPB repurchased approximately $2.1 billion of its outstanding 13.000 percent Senior Secured First Lien Notes due 2020, 8.000 percent Senior Secured Second Lien Notes due 2020, Floating Rate Senior Notes due 2019, 7.125 percent Senior Notes due 2020 and 7.375 percent Senior Notes due 2021 and issued approximately $708 million aggregate principal amount of new 12.000 percent Senior Secured Notes due 2024.
In connection with the Recapitalization Transaction, AEPB, through its wholly-owned subsidiary AEPB Acquisition Company LLC, also entered into an amended and restated credit facility. The Recapitalization Transaction reduced AEPB’s debt obligations by approximately $1.4 billion and reduced AEPB’s upcoming debt maturities over the next four years to approximately $36 million from approximately $2.1 billion.
In addition, the Recapitalization Transaction eliminated approximately $94 million of annual cash interest expense and simplified AEPB’s organizational structure. In connection with the Company’s merger of assets and the Recapitalization Transaction, the Company’s and AcqCo’s existing credit facilities were repaid and replaced with a consolidated and upsized $1.0 billion facility with an initial borrowing base of $700 million, led by J.P. Morgan Chase & Co., at the Company’s subsidiary, AcqCo.
Credit Suisse Securities (USA) LLC and Evercore Group LLC served as financial advisors and Latham and Watkins LLP served as legal counsel to AEPB. Greenhill and Co. LLC served as financial advisor and Katten Muchin Rosenman LLP served as legal counsel to the Special Committee of the board of managers of AEPB. Kirkland and Ellis LLP served as legal counsel to the Company and its private equity sponsors.