Energy: turning volatility
into opportunity
May 2015
Energy in numbers
Oil prices fell to $43.39
per barrel in March ‘15
compared to $107.95
per barrel in June ‘14
Source: Federal Reserve Bank of St. Louis
48%
Oil and gas rig count saw
a 48% decrease from April
2014 to April 2015
Source: Federal Reserve Bank of St. Louis
. Introduction
Energy companies in the oil and gas space are in the middle of one of the
most turbulent periods the industry has seen in years. Yet in the midst of some
of their toughest tests lie some big opportunities.
Energy companies are facing several challenges that have
stemmed from a prolonged downfall in oil prices that started
mid-last year. And each segment of the industry, from
exploration and production (E&P) through to midstream
and oilfield services, has its own unique problems to face.
For instance, E&P is facing continued project delays and
cancellations as margins fall alongside oil prices. Additionally,
many oilfield services firms are actively cutting costs and
headcount to counteract the commodity instability.
In April,
for example, Nabors Industries revealed that it had cut nearly
5,000 jobs in the first quarter of 2015.
This turbulence, however, has made it an equally fascinating
time for the sector’s M&A market. Energy M&A, for instance,
rose by 19% in 2014 according to Mergermarket data.
This was most marked in Q4 2014, as the oil prices began
to reach their nadir and firms looked to consolidate or sell
to stay competitive.
Taking this into consideration, times certainly seem tough for
companies operating in the oil and gas space. However, there is
some room for optimism.
Increased private equity interest could
bring much needed funding to the industry. The rebounding of
oil prices too, although modest, could hint that the worst is over.
But what is it like for those companies at the coal face?
What are they seeing that is directly affecting their businesses
across the oil and gas space, and what do they expect to see
This issue’s panelists:
in the future? With this in mind, we spoke to five executives
throughout the oil and gas sector.
Throughout, executives talk about the lessons they have
learned from downturns including the importance of portfolio
diversity, balance sheet strength, and building reserves to
be able to pursue growth opportunities despite adverse
market environments. Key points include:
Ronald Foster (RF)
Svein Sollund (SS)
CEO and President
Energy Quest Inc.
CFO
AGR Group
Dan Eberhart (DE)
Crimson Well
Services Inc.
(CWS)
• Project delays and cancellations are plaguing the E&P
subsector.
However, executives can potentially see an
activity surge as new drilling products are developed and
companies will have to increase their search for oil and
gas once again.
• The oilfield services segment has been hit by head count
and related reductions because of the current challenging
environment, but there might be opportunities to expand
geographically and develop new service lines. For now,
however, companies are mostly focusing on balance
sheet management.
• The midstream segment remains relatively unscathed
as lenders are still open to extending credit to these
companies. Yet with MLPs increasing in number and
competing for the same assets, these firms have to
reassess their growth strategies.
CEO
Canary LLC
Eric Kalamaras
CFO
Azure Midstream
Energy: turning volatility into opportunity
2
.
Exploration and Production
Low oil prices have negatively impacted the bottom line of exploration
and production (E&P) companies, testing the mettle of even the most
diligent of firms at maintaining a cost-efficient structure. How is this
being managed? Two E&P executives explain how they are addressing
the operational issues, while looking at the long-term implications low
oil prices.
MM: What changes have you made in your organization,
and with your vendors, to address the current volatility
in commodity prices?
SS: AGR had a period with very high activity levels through
2013 and 2014, particularly since the company had been
successful in broadening its scope from exploration drilling
to production drilling. Since late autumn 2014, with falling
oil and gas prices, we experienced a number of delays and
project cancellations.
AGR has always been a cost-efficient company, but with
lower volumes, we’ve had to adjust its cost base. Some
external supplier contracts have been terminated and costs
re-evaluated.
At the same time, we are working to create new
products, making them attractive for oil companies to take
advantage of the current low cost of exploration drilling.
RF: Our business model is different in that, due to being
a technology-development-based firm and having all our
orders application driven, the volatility has not affected our
organization or how we deal with our vendors.
MM: What aspect of your business will be most affected
by the current commodity price environment?
RF: The aspects of our business that will be most impacted
Ronald Foster (RF)
Svein Sollund (SS)
CEO and President
Energy Quest Inc.
CFO
AGR Group
by volatile commodity prices are those that pertain to
investments and project funding.
SS: AGR supports oil and gas companies in their daily operations,
which is, in essence, an oil company without assets. Reduced
activity among AGR’s client base affects the whole range of
AGR’s service offerings. As opposed to the financial crises in
2008 where Norway was almost unaffected, it seems that the
Norwegian Continental Shelf is the most affected area now.
We still see significant activity in Africa and South America
where AGR also has a presence.
In addition, when oil companies
increase their search for cost reductions and a variable cost base,
we see an increased demand for a totally outsourced drilling
department and AGR’s proprietary software, which helps them
save time and money.
MM: How will your business model change to take
advantage of the current market environment?
SS: As mentioned, we see an increased drive toward cost
savings and flexibility. That is exactly what an outsourcing
company such as AGR can offer. In addition, due to the large
number of well projects AGR has managed, we can offer
proven, best-in-class performance, which saves our clients
time and money.
But that is probably not enough. As Rahm
Emanuel, Mayor of Chicago, said, “You should never let a
“AGR supports oil and gas companies in
their daily operations, which is, in essence,
an oil company without assets. Reduced activity among
AGR’s client base affects the whole range of AGR’s
service offerings.”
Svein Sollund, AGR Group
Energy: turning volatility into opportunity
3
.
serious crisis go to waste.” AGR has taken the opportunity to
align ourselves with our clients by offering more incentivized
products and to improve our internal processes looking for
further potential toward cost efficiency.
RF: For us, at this point in our business, we really do not
foresee any changes in our model that are based on current
commodity price volatility.
MM: What geographic regions will be most impacted by
the recent oil price decline? Does this impact your desire
to invest in particular regions?
SS: AGR has its head office in Norway and that is the region
where we have experienced the largest drop in activity, with
Statoil leading the way. But, as a global company, we have the
opportunity to scale up elsewhere. In Africa, Latin America and
South America, there are still significant activities ongoing so
we are ramping up efforts in those regions.
RF: All regions in the oil and gas business that are located in
Alberta, Canada and the United States will be affected. The
significant impact of the oil price decline in certain regions
has definitely informed our decisions on whether to conduct
business in those regions or not.
MM: What will your industry’s M&A environment look
like in the near-term and long-term? Does the current
environment affect your M&A strategy?
RF: We are not seeking any M&A in the near future and are
also not looking to discuss any activity in the long-term.
SS: We still see some pockets of opportunity.
If low oil
prices and uncertainty continue for an extended period, and
consequently the activity level stays low, we will probably see
a series of weaker companies looking for new owners. This is
certainly an opportunity for selected acquisitions. One of the
benefits for a company such as AGR, which is under private
equity ownership, is that there is access to funds should the
right opportunity present itself.
MM: Has access to deal financing changed for
your business?
SS: Before the summer of 2014, the high-yield bond
market was very active.
After the summer, this market is,
for all practical purposes, closed for oil-related companies.
The banks are still open for business, provided there are
reasonable gearing levels.
RF: We are seeing the same thing. For our business and the
market in general, it is currently much harder to secure project
financing or to seek investors.
MM: Is there any potential catalyst that would cause
prices to rebound in the foreseeable future?
SS: I think we will see a slow increase in oil prices throughout
2015. But more important than a very high level is price
stability.
The industry has lived well with oil prices around
US$60-US$70 per barrel in the past and can do so again.
However, for oil companies to increase their activity levels,
oil prices must first stabilize.
RF: For me, there is only one major catalyst. I do not see prices
rebounding in the near future unless a war breaks out in the
Middle East.
MM: What key metrics or factors may indicate when
crude prices will experience a sustainable appreciation
in price?
SS: With the current rate of exploration, the depletion rate is
high, meaning we are using more than we are finding. Unless
some efficient alternative energy source is developed, at some
stage, oil companies will have to increase their search for oil
and gas again.
When that happens, we will see yet another
surge in activity and demand for rigs and services.
Top announced energy deals — 2014
1
$63.5bn
2
$37.2bn
3
$17.4bn
4
$14.3bn
5
$12.7bn
Kinder Morgan, Inc. bought
Kinder Morgan Energy Partners,
LP (88.6% Stake) for US$58.8bn
Halliburton Company bought
Baker Hughes Incorporated
for US$37.2bn
China Life Insurance Company
Limited; Harvest Fund
Management Co., Ltd.; Sino Life
Insurance Co., Ltd.; (among others)
bought Sinopec Marketing Co., Ltd.
(29.99% Stake) for US$17.4bn
General Electric Company bought
Alstom SA (Thermal Power,
Renewable Power and Grid
business) for US$14.3bn
Repsol SA bought Talisman Energy
Inc for US$12.7bn
RF: I have no answer for crude prices. I have seen this
before and they always, after a period of time, experience
an appreciation in prices.
Source: Mergermarket.com
Energy: turning volatility into opportunity
4
.
Oilfield Services
With lower margins and reduced demand, oilfield services companies have
had to cut costs while finding a way to navigate the downturn in oil prices.
Oilfield service executives discuss how they have remained steadfast by
working with their vendors and restructuring their operations.
DE: For us, drilling services will be more impacted than
production services and the oil basins will be more affected
than the natural gas basins. Natural gas has remained
relatively stable even though oil prices have fallen.
MM: What changes have you made in your
organization, and with your vendors, to address
the volatility in commodity prices?
DE: We’ve been working with our vendors and we’ve received
several price concessions from them that are helping us to
be more competitive in this environment. We have instituted
a ban on overtime, consolidated several positions as well as
reduced our workforce by letting some poor performers go.
CEO
Canary LLC
Crimson Well
Services Inc.
(CWS)
Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma
120
$103.34
100
WTI (Dollars per Barrel)
MM: What aspect of your business will be most affected
by the current commodity price environment?
CWS: The lower commodity price environment has negatively
impacted all aspects of our business. Workover — which
means performing major maintenance on oil and gas wells
– and completion services have experienced a significant
volume reduction, which has resulted in service price erosion
leading to cost compression (especially head count, wages
and capital expenditures).
Dan Eberhart (DE)
80
$58.58
60
40
20
0
Jun 14
Jul 14
Aug 14 Sep 14
Oct 14
Nov 14 Dec 14
Jan 15
Feb 15 Mar 15
Apr 15
Source: Federal Reserve Bank of St.
Louis
CWS: Similar to Canary, we have also implemented head count
and wage reductions along with tighter cost management and
a significant lowering of capital expenditures.
Energy: turning volatility into opportunity
5
. MM: Which geographic regions will be most impacted by
the recent oil price decline? Does this impact your desire
to invest in particular regions?
DE: Some of the plays have higher-cost structures. These
higher-cost plays will be the most affected now that oil prices
are lower. In a play like the Bakken, for instance, the labor,
the rent, and the transportation costs are all higher. To get
equipment inventory in and out is more expensive, so it is
less economic than some of the other US plays and would
be one of the hardest hit.
Shale plays and the places where
horizontal drilling is being done have a higher-cost structure
and so they would be more negatively impacted than the
places with vertical wells.
Co.-Baker Hughes. If the Halliburton-Baker Hughes merger
closes in Q3 2015 or Q4 2015, there will be a number of
divestments surrounding that. As a result of the combination,
the companies are going to have to divest businesses that
have revenues of up to US$7.5bn.
Our company is selectively
looking at some small strategic deals and are open to
acquisitions if we find firms that are balance-sheet distressed,
although we’re really more focused internally at the moment.
CWS: All oil producing regions are impacted. Investment is
constrained by the significant erosion in price and margins,
forcing focus on maintaining liquidity to service obligations.
Attractive investment opportunities may arise if the current
environment extends into 2016 and leads to distressed
valuations and to the expansion of service lines and
geographic footprint.
Total US Oil and Gas Rig Count, Jan 2014 - Apr 2015
The M&A deals that the market is going to see will be from
financial buyers, basically private equity (PE) firms that are
focused on distressed assets and are looking to bottom feed.
There are also the very large corporates looking to make
strategic acquisitions including the likes of GE and Halliburton
2,000
Total U.S. Oil and Gas Rig Count
MM: What will your industry’s M&A environment look
like in the near-term and long-term? Does the current
environment affect your M&A plans?
DE: There were sale processes in Q3 2014 and Q4 2014
that didn’t happen so a lot of assets did not change hands.
The financing has all but dried up.
The high-yield debt market
was very open for the energy sector in 2013 and 2014 but
that has all dissipated. Only a very small number of higher
echelon names are able to get that kind of financing. A lot
of companies are just focusing on reinforcing their balance
sheets rather than engaging in M&A.
CWS: We are near-term constrained, but long-term positive on
M&A.
The current gap in valuation expectations will ultimately
close, leading to an improvement in closing success rates.
“In a play like the Bakken, for instance, the
labor, the rent, and the transportation costs
are all higher. To get equipment inventory in and out is
more expensive so it is less economic than some of the
other US plays and would be one of the hardest hit. Shale
plays and the places where horizontal drilling is being done
have a higher-cost structure and so they would be more
negatively impacted than the places with vertical wells.”
Dan Eberhart, Canary LLC
1,931
1,500
1,000
954
500
Jan 14
Mar 14
May 14
Jul 14
Sep 14
Nov 14
Jan 15
Mar 15
Source: Federal Reserve Bank of St.
Louis
Energy: turning volatility into opportunity
6
. MM: What potential events could have a bullish impact
on commodity prices? What potential events will have
a bearish impact on commodity prices?
DE: Destabilization in the Middle East could lead to oil price
volatility, but what I’m worried about is the oil storage capacity
filling up. We now have a Contango situation where oil later
is worth more than oil now. Contango is something that rarely
happens and creates an incentive to store oil. The storage
facilities are filling up and companies are starting to park oil in
super containers offshore.
If US production keeps rising and
oil storage facilities are filled to capacity, this could lead to
another decrease in oil prices.
US $968m
The Middle East has only recorded one deal
worth US$968m (YTD*) compared to the US which
recorded 74 deals worth US$36,775bn
*YTD data as of 04/21/2015
Oilfield Services M&A Deal Volume, Jan 2014 - Mar 2015
50
41
40
Deal volume
MM: Are you seeing the valuation gap between buyers
and sellers widen given the volatile commodity price
environment? Do you think sellers are holding out for
an oil price recovery?
DE: Although there have always been valuation gaps, there’s
just too much disruption for buyers and sellers to agree on
pricing right now. The market is seeing something worse than
a valuation gap since these parties are so far apart. I expect this
situation to improve and to see more deals happening in the
second and third quarters of this year as the market gets later in
the cycle and companies experience more balance sheet stress.
However, the activity is going to come from sellers that are
forced or quasi forced to consummate a transaction.
30
35
28
32
25
25
25
23
34
36
27
27
20
18
20
18
Feb
15
Mar
15
10
0
Jan
14
Feb
14
Mar
14
Apr
14
May
14
Jun
14
Jul
14
Aug
14
Sep
14
Oct
14
Nov
14
Dec
14
Jan
15
Source: Federal Reserve Bank of St.
Louis
This situation is a little bit unprecedented; not in the last 56
years has the US produced so much oil that storage has
been an issue. This is something that companies did not even
consider in the mid-2000s. If this continues, production has
to stop eventually, and this would be really bad for businesses
based on drilling.
“A destabilization in the Middle East could
lead to oil price volatility.
But what I’m very
worried about is the oil storage capacity filling up.
We now have a Contango situation where oil later is
worth more than oil now, which is not usually the case.”
Dan Eberhart, Canary LLC
Another thing that worries me is that a lot of the demand
growth in the past 10 years has been based on the growing
Chinese economy. If China’s economic growth slows, this
is going to have a massive impact on demand growth in oil
and gas and prevent a price rise.
CWS: We are bullish on the reversal of current supply over
demand fundamentals, which will result from continued
global GDP growth and impairment on sustaining production
through reductions in allocated capital. We also expect
geopolitical events to negatively impact production.
Energy: turning volatility into opportunity
7
.
On the other hand, we are bearish on the widening supply over
demand fundamentals that may result from slowing global
GDP growth and a less-than-expected decline in production.
We also expect additional production to be brought to market
as a result of softer sanctions.
We are planting the seeds of the next up cycle right now.
People are making long-term decisions based on the short-term
operating environment and that’s going to lead to supply and
demand imbalances in the mid-term, which will lead to higher
prices. This is just the classic oil and gas boom-bust cycle.
MM: What advice would you like to provide recent
entrants to the energy industry as they work their
way through the downturn?
DE: Business owners should focus on balance-sheet strength
and to take a longer-term outlook. For the sector in general,
I still think it is a dynamic industry and has a lot to offer.
Although it currently has technical and business challenges,
it also offers amazing opportunities. I believe we are in the
middle of an American energy renaissance, although there
is going to be some short-term pain so those that persevere
will be successful in the long-term.
I believe that the supply and demand imbalance will right
itself eventually.
Global demand is something in the order of
92 million barrels per day of consumption and the US has an
oversupply of 1 or 2 million barrels so on a percentage basis,
supply is really not that far ahead of demand. This is why it will
just take a little bit of supply destruction and demand growth
to result in a balanced market or potentially somewhat of an
unbalanced market on the side of supply shortage.
CWS: Manage your business with a focus on maintaining
cash liquidity that services obligations and builds reserves
for growth opportunities. Market share growth initiatives
seldom work and generally lead to liquidation or, at a minimum,
distressed financial performance.
Those with realistic
expectations will generally survive. Develop a cost buildup
template focused on pricing, given the overall supply over
demand market environment. Rightsize your business to the
current market and make it work.
“Manage your business with a focus on maintaining cash
liquidity that services obligations and builds reserves
for growth opportunities.
Market share growth initiatives
seldom work and generally lead to liquidation or, at a
minimum, distressed financial performance.”
Crimson Well Services Inc.
CWS: Excluding the impact from unknown geopolitical unrest
and anticipating a sustained above three percent global GDP
growth rate, we expect a West Texas Intermediate (WTI)
average of US$55 in 2015 and US$75 in 2016 and for oil
prices to exit 2015 at US$65 and 2016 at US$90.
MM: What do you believe crude prices will average for
2015 and 2016? What do you forecast crude prices will
be at the end of 2015 and 2016?
DE: My outlook is that US production is going to continue
assuming demand is constant. I expect US oil production is
going to continue to increase through June or July of this
year and then will start to fall. I project oil prices to start to
rise by the fourth quarter, and by mid-2016, hit US$100
a barrel.
In the past 90 days, US$150bn of oil and gas
infrastructure projects have been postponed or cancelled.
Energy: turning volatility into opportunity
8
. Midstream
Despite setbacks, the midstream sector still has M&A opportunities
available as capital markets remain open. Azure Midstream’s Eric Kalamaras
details how his company and midstream in general is dealing with the
current volatility in commodity prices.
MM: What will your industry’s M&A environment look
like in the near-term? Does the current economic
environment affect your M&A plans, and if so how?
Generally, we are finding that banks, other lending institutions
and the capital markets are being supportive. If there are some
changes in this area then it would be a catalyst to change our
M&A plans. We are still going out, looking for opportunities and
having the same conversations we were having before, but
we are not seeing anything that compels us to become much,
more aggressive.
Generally what happens is that when prices come down,
struggling companies contemplate selling.
Depending on
where they are in the cycle of their investments or assets, they
tend to wait and see if pricing stabilizes, since nobody wants
to sell at the bottom. Forced selling is not happening yet in the
midstream space. This is more of a reality for the oil and gas
service sector, which is more affected since there is no way
for these firms to hedge their cash flows.
This is why they are
the first ones to experience job layoffs, which tend to get a lot
of media attention. There are also select names on the oil and
gas side that are becoming distressed.
MM: What are the deal drivers in the midstream segment?
What is your dealmaking outlook for this segment in light
of the current state of commodity prices?
The deal drivers that we tend to see in the space are about
scale and asset-base-growth. I am referring to operating scale,
which usually leads to creating molecule integration.
This is when
we hold on to as many molecules and put them into as many
profitable businesses as we can, effectively giving the producer
a large service platform. The benefit to producers is that we are
able to offer them various related businesses. The benefit to us
is that we have various business models and revenue centers
that come along with those service offerings.
What we, and
producers of midstream processes, try to do is go through an
integration phase that lends itself to acquisitions where we bolton another type of business or asset. Sometimes that has to do
with molecular integration, but other times it is done to support
other growth and increase cash flow. We are also seeing deals
done to gain true operating scale so companies can compete
effectively with larger firms that have a much more expansive
operating footprint, bigger capital base, broader service offering
and that can fund projects more cost-effectively.
Eric Kalamaras
CFO
Azure Midstream
“Forced selling is not happening yet in the
midstream space.
This is more of a reality
for the oil and gas service sector, which is more affected
since there is no way for these firms to hedge their cash
flows. This is why they are the first ones to experience
job layoffs, which tend to get a lot of media attention.”
Eric Kalamaras, Azure Midstream
In our case, we are active and transactional as a commercial
management team. This is always going to be the case
whether prices are high or low.
We are always going to
find assets at the right price and with the right risk return.
But, it is harder to do larger corporate deals because we are
Energy: turning volatility into opportunity
9
. not dealing with a C corporation (C corp) environment. In a
master limited partnership (MLP), there are general and limited
partners. General partners (GPs) have a separate governing
structure, which isn’t as conducive to corporate deals. There
are value pools that have to be considered and are inherently
more complicated.
Lately there has also been activist pressure
on the C corp side, which isn’t present in an MLP structure.
Limited partners don’t have a vote, so there is no natural
catalyst on the shareholder level. It then becomes a function
of the general partner’s view of how to best grow the asset.
Additionally, GPs are often times private, so they don’t have
a commodity that has to ebb and flow in a marketplace.
MM: Has access to deal financing changed for your
business?
It can always change, but right now the private capital markets
are doing the best job to give our producer costumers as
much flexibility as possible to manage their business, since no
lending institution or group of institutions are incentivized to
take possession of these assets. Lenders are trying to give as
much leeway as they can while protecting their balance sheets
and investments.
For us, on the midstream side, it is not as
robust as it was, but until there is either a meaningful change
in producer behavior or interest rates, the capital markets are
going to remain fairly receptive.
MM: Have valuations changed? If so, how and why?
As we bifurcate the midstream space and MLPs further, we
are seeing pockets where there is a fair bit of commodity
price sensitivity. Contract streams, for instance, are trading
at certain levels that are more attractive. But when they are
evaluated in terms of the environment and adjusted for the
current commodity price mix, the question is: are the returns
acceptable? The price might come down, but so does the
commensurate cash flow and returns.
However, we are not
spending a lot of time looking at those types of assets since
they do not fit our core strategy. Experience has told us that
taking a lot of risk, such as contract and pricing risk, is a very
challenging model for a MLP and so we try to avoid that.
Global energy M&A deal value, 2010 - 2014
2010
US$403.0bn
2011
US$402.7bn
US$437.0bn
2012
2013
US$333.8bn
2014
US$549.2bn
Source: Mergermarket.com
MM: What changes have you made in your organization,
and with your vendors, to address the current commodity
pricing environment?
We are positioned for growth and so we haven’t made any
material organizational changes. Certainly as part of our
acquisition of Marlin Midstream earlier this year, we did some
corporate rationalization just as in any business combination,
but it was not a result of the current environment and
commodity prices.
We have protected ourselves by having
appropriate contracts and fixed-fee mechanisms and we are
constantly evaluating how we could best position our business
to grow in a host of environments and commodity price ranges.
US $26.7bn
Global buyouts for 2014 totaled 150 worth US$26.7bn
compared with 48 exits worth US$27.3bn
MM: What lessons have you learned from prior industry
downturns and the cyclicality of the business that have
best prepared for the current industry environment?
A balanced portfolio of commodity exposure is beneficial
because natural gas, crude oil and associated products will not
always trade together and trade differently over time. We are
currently looking for ways to try to create a more balanced mix.
We also want to balance out our basin and customer diversity,
which will give us the ability to enhance optionality in one
asset versus another. We predominantly want to be fixed-fee
oriented and are only taking an indirect commodity price risk,
Energy: turning volatility into opportunity
10
.
an important lesson that we have learned. One thing we found
over time is that having too much commodity price exposure
coupled with high leverage is a very difficult combination
to work through in certain price environments, such as the
current one. We are not alone. The fixed-fee structure has
become more common in the last few years, specifically for
MLPs that were established after the financial crisis.
MM: What kind of challenges and opportunities do you
expect for midstream in the long-term? Which factors
may impact your vendors and demand outlook the most?
We have to be mindful over time of the impact of interest rate
changes and how those impact the cost of and relative value
of capital pools that are available to the midstream space and
to MLPs in general.
As a smaller player, we also have to be conscious that it
becomes inherently hard to compete for assets.
Growth in
the MLP space has also resulted in a rise in asset values. It
becomes difficult the smaller one gets to transact at that level.
What this forces us to do is to evaluate corporate transactions,
although the structure can get tricky to execute. That can
create a challenge for certain GPs to manage through.
With the increasing number of MLPs, they are starting to
chase many of the same assets and that competition has
created a shift over time in the way many of these companies
pursue their growth profiles and objectives, particularly in a
sustained commodity price low cycle.
We also have to look
at whether there is any systemic changes in attitude of how
people perceive the GP’s value and whether that will lead to
more combinations. It is an interesting paradox. On the one
hand, there are too few assets available for many of the entities.
But there’s the paradox of how to grow relative to a structure
where it can be challenging to do given the separate value
mechanisms that have to be worked through.
When combining
two MLPs, there are four entity value-creation vehicles involved.
In a C corp deal, the complexities are much less since there are
only two of these entities involved. I am curious how some of
these entities manage this transition, although many of these
MLPs are PE-backed. The benefit of having a PE-backed
sponsor is the flexibility and time to work through these issues.
“We also have to look at whether there is
any systemic changes in attitude of how
people perceive the GP’s value and whether that will
lead to more combinations.
It is an interesting paradox.
On the one hand there are too few assets available for
many of the entities. But there’s the paradox of how to
grow relative to a structure where it can be challenging
to do given the separate value mechanisms that has to
be worked through.”
Eric Kalamaras, Azure Midstream
MM: Which geographic regions do you consider the
most or least attractive for acquisitions or bolt-on
opportunities? Does this impact your desire
to invest/consider acquisition in particular regions?
We’re always looking for assets that we think have really good
and outsized risk and reward characteristics. We do not look
at geographies or basins and determine that we have to be
there.
We realize that there is value in assets flying below the
radar screen and if we did our homework, these assets have,
in many cases, just as good of a risk profile characteristics. We
are not trying to chase trends and not trying to pay the highest
multiples. We try to think about our portfolio as one of stocks
where we are bottom up, while some people are top down.
Energy M&A Regional Volume, Value and Cross-border Deals, 2013 - 2014
US
Canada
346
454
2013
2014
2013
2014
Volume
122.4bn
294.1bn
43
Value 6.7bn
Number of deals
2013
2014
Europe
106
169
2013 16.0bn
2014 46.0bn
Volume 14
Value 17.6bn
Middle East
361
359
2013
2014
2013
2014
Volume
84bn
91.3bn
69
Value 35.1bn
Value of deals (US$bn)
Africa
Asia-Paciï¬c
2013 8
2014 15
2013
33
2014 16
2013
2013 0.05bn
2014 1.1bn
2013 19.3bn
2014 5.5bn
2013
Volume 6
Value 0.5bn
Cross-border deals 2014
Volume 8
Value 0.8bn
2014
2014
160
224
64.9bn
71.2bn
Volume 30
Value 14.4bn
Source: Mergermarket.com
Energy: turning volatility into opportunity
11
.
What makes (or breaks) an energy deal?
The balance sheet doesn’t always hold the answers.
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. European Contacts
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Chicago
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Paris
Yann Magnan
Valuation Advisory Services Leader for Europe
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yann.magnan@duffandphelps.com
Senior Advisors
John McNabb
Senior Advisor
john.mcnabb@duffandphelps.com
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Senior Advisor
jed.dipaolo@duffandphelps.com
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