member sipc ipaa leaders in industry luncheon “trees don’t grow to the sky” u.s. deal flow in...
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Member SIPC
IPAA Leaders in Industry Luncheon“Trees Don’t Grow to the Sky” U.S. Deal Flow in the Current Oil Price Environment
January 7, 2015
William A. Marko Managing DirectorJefferies LLC
Jefferies Energy Group Has a Leading Global Market Share
In last 6 years, completed 230 transactions for more than $325 Billion
Our practice is the largest dedicated to oil and gas by any Bank in the world─ Focus on upstream, midstream and service─ 35 technical professionals, we go deeper technically than anyone
1
Sale of Gulf of Mexico Deepwater Assets to Freeport-McMoRan
Copper & Gold Inc.Joint Financial Advisor
May 2014Pending
Energy
$1,400,000,000UndisclosedSale of Chevron’s Beaumont Crude
Oil and Refined Products Terminal to
Phillips 66Exclusive Financial Advisor
June 2014
Sale of Utica and Marcellus assets to American Energy – Utica and
American Energy – MarcellusSole Financial Advisor
June 2014Energy
$1,750,000,000
and Unnamed Private Company
Sale of Onshore U.S. Assets to Linn Energy, LLC
Joint Financial Advisor
June 2014Energy
$2,300,000,000
Sale of Permian Basin Assets toAmerican Energy – Permian
BasinSole Financial Advisor
June 2014Energy
$2,500,000,000
February 2014
Convertible Notes OfferingJoint Bookrunner
$750,000,000
Energy
Acquisition of Granite Wash assetsfrom LINN Energy, LLC
Sole Financial Advisor
October 2014Energy
$1,950,000,000Credit Facilities to Finance
Acquisition of Marcellus Shale assets
Joint Lead Arranger
$1,200,000,000
August 2014Energy
Sole Financial Advisor to the Conflicts Committee of KMP and
KMR
August 2014
Kinder Morgan, Inc.’s acquisition of Kinder Morgan Energy Partners,
Kinder Morgan Management and El Paso Pipeline Partners
Energy
$71,700,000,000
Sale of Powder River Basin assets to
Chesapeake Energy Corporation
Sole Financial Advisor
July 2014Energy
$450,000,000+ Powder River Basin Assets
In September 2014 I discussed the fact that industry was running at full speed─ Rig count plateauing about 1,900─ Oil price at ± $90/Bbl and natural gas price at $4.00 per MMBtu─ Vast majority of companies running as many rigs as possible
limited by people, capital, execution capability
Many companies complaining about capital efficiency and the need to do better─ Still challenged by execution efficiency─ Have more acreage than they can possibly ever drill
It felt like we were heading to a bubble
Now the bubble has burst
Running at the Redline Now a Thing of the Past
2
Saudi Arabia defending its market share inside and outside of OPEC─ It can hold its breath for a long time─ This also hurts Russia, Venezuela, Iran, which is not a bad thing
We are now participants in a grand experiment to see how much U.S. production changes based on the level at which pricing stabilizes─ Will depend upon how quickly companies live within cash flow─ Will also depend upon how and where rigs are cut and how long
it takes for production to be impacted
Prepare to live in $60-70/Bbl oil in the near term
Hopeful long term is $70-80/Bbl oil
Absent any disruptions in Middle East or wild swings in Chinese or other demand
Oil Price Uncertainty – Fasten Your Seatbelts, it is Going to be a Bumpy Ride
3
Sovereign Wealth
Fund Size
$66 B
$62 B
$1 B
$1 B
NA
$77 B
$18 B
$757 B
$5 B
$256 B
$773 B
$548 B
Estimated Oil Price Needed to Balance Budgets
Source: Libyan government; Angolan Ministry of Finance; International Monetary Fund; Arab Petroleum Investments Corp.; Deutsche Bank.
Qatar
UAE
Kuwait
Libya
Saudi Arabia
Angola
Iraq
Ecuador
Nigeria
Algeria
Venezuela
Iran
$65
$70
$75
$90
$93
$98
$106
$117
$119
$121
$121
$140
December 31st Brent Crude Price: $56.42 / Bbl
4
Falling Oil Price Should Not Have Been a Big Surprise But the Current Size of the Fall Certainly Is
YE 2014 YE 2013
YE 2012 YE 2011
Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20$0.00
$25.00
$50.00
$75.00
$100.00
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19$0.00
$25.00
$50.00
$75.00
$100.00
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18$0.00
$25.00
$50.00
$75.00
$100.00
Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17$0.00
$25.00
$50.00
$75.00
$100.00
5
Natural gas is not necessarily the safe port in the storm
Price has broken through $3.00 per MMBtu
We were fortunate last year with a very cold winter and record high storage draws
Still a great deal of potential supply─ New wells in Utica dry gas─ Potential from SCOOP, Haynesville, more Marcellus, other areas
Industry continues to improve efficiencies so cost of supply decreasing in the best areas
One potential bright spot - Some near term demand increases─ Switching from coal for power generation─ First LNG exports in 2015 with more to follow─ Natural gas fed manufacturing starting to come online─ Feels like we live in $3.00 - 4.00 per MMBtu and hope for +$4.00
per MMBtu in the future
Natural Gas Price Weakness – The One-Two Punch
6
ARC Test – to be used when considering choices and the best choices adhere to all three premises
Affordable
Reliable
Clean
Good Examples─ Natural gas switching from coal for power generation─ Solar/wind with natural gas supplemented power generation
Bad Examples─ Germany pushing solar and wind while shutting in nukes,
banning fracking and increasing coal use for power generation─ Solar or wind powered automobiles
Energy Supply Sources
7
Market Update
NYMEX WTI spot trading below $60 for the first time in over five years and the range of price expectations amongst buyers / investors has widened
─Driven by oversupplied markets and weak demand, despite backdrop of highly elevated geopolitical tensions
Forward expectations for gas prices remained relatively stable over the past few years
M&A activity was in full rebound in 2014, prior to recent downturn, where recent volatility has resulted in a significant slow down
3 Year Historical Commodity Pricing Range
Equity Performance (% of 52 Week High)
Average North American E&P M&A Volume ($B)
US Energy HY Index (%)
10-Year Average 2010 - 2012 2014 December Annualized
$85.6$102.4
$91.0
$16.6
S&P 500 S&P E&P Index Alerian MLP Index
98.5%
71.9%85.1%
10-Year Average (Pre - 2007)
2011 -2013 Average Current
9.28%
6.40%
9.54%
Henry Hub Spot ($ / MMBtu)
$1.82
$3.26
$7.92
$4.49
WTI NYMEX Spot ($ / Bbl)
36 Month Forward ($ / Bbl)
$52.69
$60.01
$110.53
$105.31
Current (January 2, 2014)
8
Collapsing Oil Prices Have Triggered a Sell-Off in Oil and Gas Equities
WTI has fallen by nearly 50% since June 1; $327 B removed from the market value of largest 40 companies over the same period
Industry implications – anticipated behavior in the event of prolonged weakness
─ Tighter capital discipline: more project deferrals, JVs with cost carries, opex cuts
─ Exploration: budgets reduced in 2015, notably on frontier; focus shift to mature, lower-risk plays
─ Tight oil: rigs dropped in new or marginal plays, retrenchment to sweet-spots to maintain production growth
─M&A: a flush of assets onto an opportunity-rich market; potential for distressed sellers / countercyclical buyers
Market Capitalization Changes since June 1, 2014 (1)
(1) Source: Bloomberg Financial, as of 1/2/2015.
Small Caps Mid Caps Large Caps Majors
ShellExxonMobil
ChevronSuncor
EOGTotal
DevonCNRL
BPEni
HuskyCenovusPioneer
NewfieldStatoilCallon
ChesapeakeEncana
ContinentalDenburyTriangle
ExcoNorthernSanchez
Quicksilver
(4.5)%(8.9)%(9.0)%(11.7)%(12.6)%
(17.2)%(17.3)%(17.9)%(19.1)%
(22.1)%(24.0)%(24.4)%(25.8)%(26.1)%
(29.1)%(30.4)%(31.0)%
(35.6)%(44.7)%
(53.0)%(58.9)%(60.1)%(62.1)%
(69.6)%(92.0)%
9
Source: Bloomberg, Capital IQ and Jefferies internal estimates.(1) Analysis assumes current pricing as of 12/31/2014 and historical pricing as of 12/31/2013.
12-Month Price Performance by Size
12-Month Price Performance by Oil Commodity Mix
12-Month Price Performance by Leverage (Total Debt / 2014E EBITDA)
12-Month Price Performance by Focus Area
Recent E&P Market Performance (1)
Majors Large Cap Mid Cap MLP Small Cap
(11)%(21)%
(39)%
(57)%(49)%
< 20% Oil 20% - 39% Oil 40% - 59% Oil 60% - 79% Oil 80% - 100% Oil
(32)%(40)%
(33)% (35)%
(52)%
< 1.0x 1.0x - 1.9x 2.0x - 2.9x 3.0 - 4.0x > 4.0x
(11)%(26)%
(45)%(59)% (55)%
10
Permian Appalachia Diversified Eagle Ford Bakken
(10)%
(29)%(36)%
(54)%
(38)%
Company 2014 2015E Change
Atlas Resource Partners $ 190 $ 200
Clayton Williams Energy 389 400
Energy XXI 705 680
Energen Resources 1,350 1,300
Total SA 26,000 25,000
PDC Energy 637 557
ConocoPhillips 16,875 13,500
Rosetta Resources 1,200 950
Stone Energy 895 700
Concho Resources 2,600 2,000
Sanchez Energy 1,150 875
Apache 5,440 4,000
Halcón Resources 1,100 775
Antero Resources 3,700 2,400
Swift Energy 395 250
Continental Resources 4,550 2,700
Oasis Petroleum 1,425 800
Breitburn Energy 375 200
Denbury Resources 1,100 550
Goodrich Petroleum 350 175
LINN Energy 1,550 730
2015 E&P Capital Spending Outlook
Source: Company investor presentations, press releases and earnings call transcripts.
11
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
5%
3%
(4%)
(4%)
(4%)
(13%)
(20%)
(21%)
(22%)
(23%)
(24%)
(26%)
(30%)
(35%)
(37%)
(41%)
(44%)
(47%)
(50%)
(50%)
(50%)
(53%)
WTI Oil Breakeven Price @ $3.60 / MMBtu Natural Gas ($ / Bbl)
Source: Wall Street research.
Utica-Wet Gas
Marcellus Shale - Super Rich
Eagle Ford - Liquids Rich
Wolfcamp - N. Midland (Horizontal)
Cana - SCOOP Condensate
Bone Spring (1st / 2nd) - NM
Utica - Condensate
Wolfcamp - S. Midland (Horizontal)
Bakken Shale
Uinta - Green River
Wolfcamp - N. Delaware (Horizontal)
Mississippian Horizontal - West
Uinta - Wasatch (V)
Granite Wash - Liquids Rich Horiz.
$36.01 $39.30
$42.77 $50.41 $51.64
$53.60 $53.71 $53.84
$56.27 $57.72 $57.97
$61.61 $63.04
$64.77 $65.92
$67.80 $68.72
$70.70 $72.02 $72.40
$75.95 $76.40 $77.36 $77.40
$79.35 $82.80 $83.47
$84.97
$50 $60 $70
12
Eagle Ford Type Curve Map
13
High Disparities in Eagle Ford Costs
Source: Publicly available information.
Execution is the Paramount Consideration, Especially Today
14
Eagle Ford Well Costs By Operator
Oper
ator
1
Oper
ator
2
Oper
ator
3
Oper
ator
4
Oper
ator
5
Oper
ator
6
Oper
ator
7
Oper
ator
8
Oper
ator
9
Oper
ator
10
Oper
ator
11
Oper
ator
12
Oper
ator
13
Oper
ator
14
Oper
ator
15
Oper
ator
16
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$-
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$1,854
$1,742
$1,657
$1,533 $1,494
$1,256 $1,250
$1,150 $1,125 $1,100 $1,080 $1,038 $1,036
$917
$795
$625
$9.2 $8.4
$7.3 $7.7 $6.7
$7.5 $6.6 $6.9
$9.0
$6.6 $5.9 $5.5 $5.8 $5.5
$6.3
$2.8
$ / Lateral FootD&C Capex ($MM)
Most Recent Permitting Data Suggests a Structural Downward Shift in Activity
Source: HPDI as of December 31, 2014.
Total 2014 U.S. Lower 48 Permit Issuance
5,427 5,433
6,6916,969
7,346
6,647
7,076
7,598 7,545
8,745
5,7515,392
(34%)
15
Year End Active Rigs by Play
Permian (Hz .) Eagle F o rd Permian (Vt.) Bakk en Marc e llus Niobra ra Woodford Utic a Haynes v ille Ba rne tt
223
232
219
196
93
41 45
33 39 41
293
228
232
183
85
49 51
38 41
33
367
200
163 179
77
58
56
49
40
24
Dec-12Dec-13Dec-14
Impact of New Oil Pricing Environment Not Fully Reflected in Current Rig Counts
Source: Wall Street Research; Baker Hughes North America Rotary Rig Count as of January 2, 2015.
Play Permian (Hz.)
Eagle Ford
Permian (Vt.)
Bakken Marcellus Niobrara Woodford Utica Haynesville
Barnett
16
2015E vs. 2014 Rig Count by Basin
Source: Spears & Associates, Drilling and Production Outlook.
Missis-sippian
Granite Wash
Barnett
Woodford
Fayetteville
Haynesville
Canada
DJ / Niobrara
Utica
Eagle Ford
Williston
Permian
Marcellus
(27.7)%
(22.7)%
(19.6)%
(18.7)%
(18.2)%
(16.2)%
(11.1)%
(10.8)%
(9.0)%
(8.8)%
(8.7)%
(7.1)%
(5.8)%
17
2014 High Yield Market Performance
2014 Equity Market Performance (1)
2014 E&P Capital Markets Environment
Source: Bloomberg Financial as of 1/2/2015.(1) Bakken index: CLR, EOX, NOG, OAS, TPLM, WLL; Permian Index: AREX, CPE, CXO, FANG, EGN, LPI, PXD, RSPP, XEC; Appalachia Index: AR, COG, ECR, GPOR, RRC, RICE.
Dec-13 Mar-14 Jun-14 Sep-14 Dec-142.0%
4.0%
6.0%
8.0%
10.0%
US High Yield Energy Index BB Index B Index
Yie
ld t
o W
ors
t (%
)
9.54%
6.96%
5.17%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15
-60.0%
-30.0%
0.0%
30.0%
60.0%
S&P 500 36 Mo. Fwd. WTI NYMEX Bakken Index Permian Index Appalachia Index S&P E&P Index
Rela
tive P
erf
orm
an
ce (
%)
12 M ∆ 6 M ∆
+12% +4%
-8% -19%
-10% -33%
-29% -35%
-29% -31%
-38% -56%
18
North American Onshore E&P Deal Volume Since 2010 ($B) (1)
E&P M&A Market Review
Source: IHS Herold and Jefferies estimates as of 12/31/2014.(1) Includes North American onshore corporate and asset-level transactions greater than $100 MM USD.
Prior to recent downturn, M&A set for full rebound in 2014, but oil price collapse has halted activity
M&A activity driven by portfolio reshaping Focus had also shifted to transactions with more production and less drilling
risk Current M&A market “frozen” by volatility in commodity prices and cost of
capital Buyers less affected by current weakness likely to take advantage of
“buyers” market
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42010 2011 2012 2013 2014
$-
$10
$20
$30
$40
$50
-
10
20
30
40
50
$15.6
$29.9
$16.9
$31.2
$15.9 $15.3
$33.0
$25.8 $28.7
$11.5
$40.4 $42.8
$7.6 $8.8 $10.3
$21.4
$17.8
$28.4 $28.4
$16.4
Deal V
olu
me D
eal C
ount
19
North American Onshore E&P Deal Volume in Q4 2014 ($B) (1)
E&P M&A Market Review
Source: IHS Herold and Jefferies estimates as of 12/31/2014.(1) Includes North American onshore corporate and asset-level transactions greater than $100 MM USD.
October November December $-
$5
$10
$15
$20
-
5
10
15
20
$13.2
$1.8 $1.4
Deal V
olu
me D
eal C
ou
nt
20
Deal Flow Hunters and Prey
High Value EquityLow Debt
Low Value EquityHigh Debt
Low CashHigh Cost
High CashLow Cost
OilPrice
Chapter 11
RestructuringDebt/Fire Sales
Sell Oil Assets
Sell Gas Assets
Solid Cash Flow
Find JVPartners
Ability to Cut Capital & Grow
Lots of Equity
Lots of Cash
POTENTIAL SELLERS
POTENTIALBUYERS
21
Big private equity are geared up to hunt for opportunities─ More than $50 B in equity raised─ Combined with leverage this provides more than $100 B in
purchasing power
Could be an opportune time for the majors for mergers or major acquisitions─ Generally have lots of cash─ Historically have completed mergers in low price environments─ They are wrestling with execution of what they already own,
and they will focus on costs
Most companies will need to live within available cash flows─ Large capital program reductions─ Pressure on how to manage big portfolios
Internationals renewing interest in North America ─ Seeking acquisitions that come with people (corporate or asset)─ Some still interested in JVs with top tier operators ─ Many have said they are looking for "bargains"
What Does All This Mean for U.S. Upstream Deal Flow?
22
Watch for capitulation by sellers─ Most desperate may need to sell oil properties at the bottom─ Sellers will hold out as long as possible while considering uses of
asset sale funds (service debt, reinvest capital)─ If natural gas price does not remain too weak, could be a good
time to sell natural gas assets
Buyers will need to be very disciplined and focused in order to most effectively screen and evaluate deals─ Know the strengths and weaknesses and areas of most
competitiveness─ Move fast in a briskly changing environment─ Be able to sort through a seemingly endless number of
opportunities to clearly identify the most attractive
Companies should be prepared for an “open window” in M&A markets
Private capital markets are least impacted by recent events especially longer hold periods – don’t have to live quarter to quarter
What Does All This Mean for U.S. Upstream Deal Flow? (Cont’d)
23