Green shoots of optimism are poking through the parched ground of the oil patch lately as industry focuses on the aftermath of a downturn they hope has troughed. But the US E&P sector that emerges from the latest carnage will be different as business models will be forced to change.
With crude oil hanging just shy of $40/b, industry-watchers say capital is still available to survivors of the downturn that are in relatively good financial shape. But lending criteria will be stricter as more will be asked of borrowers and production hedges may be more prevalent, they say.
Nearly $39 billion of private equity funds were raised in 2015, and on top of that there was a “substantial” amount of dry powder remaining from funds raised in 2014, Doug Reynolds, managing director and head of US business for Scotiabank, said at the Hart Energy Capital Conference last week.
“The majority of US production is owned by companies that are financially strong and there is new equity [raised] that will make them more so,” Reynolds said.
US E&P companies have recapitalized to the tune of nearly $11 billion in equity so far this year, compared to $8.6 billion in Q1 2015, he and others noted.
While many oil companies will likely disappear, victims of liquidations and takeovers, “we think for the guys that make it through, it will be somewhat of a golden era for them,” Reynolds said.
But they will have to be fiscally lean and efficient. For one thing, lenders may be skeptical of companies whose acreage is not top-tier or industry-proven as they have seen many bankruptcies in the current downturn
A recent count by law firm Haynes and Boone put oil industry bankruptcies north of 50.
Focus to stay onshore for faster returns
During the downturn, oil companies produced from their best, highest-return wells. They have also concentrated on land plays since the returns are quicker, unlike offshore projects, which can take as long as 10 years to come onstream.
The shift to onshore production is expected to continue due to the lower costs and speedier returns available.
And while well costs have come down both onshore and offshore due to concessions from oilfield service companies, offshore wells have not experienced the astounding efficiency leaps that have been such a large part of the shale revolution onshore and allowed those operators to survive sub-$50/b oil.
Costly or lengthy projects in the US will be “challenged” going forward, Wil VanLoh, CEO of private equity firm Quantum Energy Partners, said at the Hart gathering.
The downturn will refocus public oil companies on making money more quickly rather than growing production and reserves. This will “materially” alter or even eliminate certain business models, such as long-cycle projects in deepwater and international arenas, or high-cost projects in the Gulf of Mexico, oil sands, upstream master limited partnerships and the bottom 50% of resource plays, VanLoh said.
Only the exceptional of these projects will be moved forward.
In addition, the private equity model of funding may be changed post-recovery, VanLoh said.
“The model where you lease land, drill a few wells and flip [the developed assets] to a public company is likely a thing of the past,” he said.
“Public companies have much less money to buy this stuff now, and they have a lot of acreage of their own,” he added. “PE-backed companies will have to more fully develop their assets, requiring more money and more time, so quick flips won’t be as prevalent.”
Going forward, debt capital will be harder to get and cost more, while acquisitions will require more equity and that should drive down the prices of assets.
“Expect more erratic prices, capital markets, and [mergers, acquisitions and divestiture] activity,” VanLoh added.
Also, hedging production to protect revenues will likely figure more into the equation. “Public and private companies will have to hedge more for a period of time to get deals done,” he said.
Lenders may also be under more stringent requirements to determine what a given company’s borrowing base should be with everything from interest coverage to debt asset ratios getting a fresh look, analysts said.
Borrowers will also have more responsibility. They will need to prove their price forecasts, and the viability of their budgets, and how they will achieve positive cash flow, Deborah Byers, US oil and gas leader for EY, formerly known as Ernst & Young, said.
“There will be a lot more rigor around forecasts that are presented to support borrowing bases,” Byers said.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
ParamountEnterprises with a renowned brand .PARENTNashik is an ISO 9001:2015 certified company, listed in major leading manufacturers, suppliers & exporters of resistance spot welding consumables, spares, weldparts in Nashik – India.
PARENTNashikis younger energetic, with highly skilled engineering group having extensive more than 2-decade experience in resistance spot welding supplies and installed latest technology machining facility at works, manufacturing all sorts of resistance gun spot welding spares &consumables.
Product know-how more than 20 years of experience in resistance spot welding
Design, optimization & production of special spares, parts
Products that meet all international quality standards & requirements.
Productionline having next-generation CNC machinery.
Express production service available
Resistance Welding Consumables &Spot Welding Gun Spare WeldParts Offered:-
Spot welding electrodes,cap tips, bend electrodes, double bend electrodes, shanks, holders,gun arms dully insulation coating, adapters,flexible shunt,braided cables, water cooled kickless cables, jumper aid cables,bracket in aluminium & copper, gyro ring rotational assly.,electrical busbar, busbar 3D, swivel pad electrodes, projection welding electrodes,nut welding electrodes, nut welding pins, ceramic pins, insulating bush, elkonite faced electrodes, projection welding electrode caps,seam welding wheels, shaft, silver contacts, bush, housing body,conductive grease, restoration of seam welding housing frame, robotic welding shank, robotic holders, robot welding cables, on-line &Offline Gun Arm Insulation coating, BS807 electrode tips flat,centre, offset, angle offset, cranked, spade, jobbing, reducing adapters, straight stem holders, threaded adapters, ISO adapters, nut welding bodies, nut weld pins, nut welding caps, ISO electrode tips,PSA style electrodes. Copper Chromium Zirconium, Beryllium Copper,Nickel silicon Copper Chromium, RWMA Class-2,Class-3,C-18150,C17510,C17500 Copper alloy, rods, flats, bars, Threaded electrodes,composite electrodes, Male electrodes, offset electrodes, single crank electrodes, double bend electrodes, swivel electrodes, cap adapters, reducing adaptors, double bend cap adaptors, Merituselectrodes, tool post, water connections, water tubes, horizontal adaptors, horizontal toolpost holderBloster, Horseshoe adaptors,Machine arm, plattern, Projection weld nut assemblies, ceramic coated sleeves for stud welding, stud electrode, solid ceramic bush, stud electrode elkonite faced, projection welding bodies, copper tungsten faced electrodes, insulated nut electrodes, ½”screwed electrodes,pad bolt, short tool post.
.PARENTNashikalso offers variety of unique refractory metals for resistance spot-welding like Elkonite- Tungsten, Tungsten copper, molybdenum,graphite, TZM tipped electrodes.
Presentlysatisfied customers are in India, Malaysia, Middle East, Europe-France, Spain, Italy, and USA.
Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
Headlines of the week