BoyarMiller Energy eBook 2013 State of the Industry
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BoyarMiller Energy eBook 2013 State of the Industry

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We've brought together the top insights into energy industry trends and best practices in our downloadable eBook, State of the Energy Industry. ...

We've brought together the top insights into energy industry trends and best practices in our downloadable eBook, State of the Energy Industry.

A helpful resource of industry-leading insights on gas and crude production, job growth within the industry, the current regulatory and political environment, capital markets and private equity investing.

We hope you find value in the information we've gathered from industry-leading clients and partners: David Pursell of Tudor, Pickering, Holt & Co., Tom Hargrove of GulfStar Group and James Wallis of Lime Rock Partners.

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  • 1. 2013 State of the Industry Energy
  • 2. Chairman’s Letter To Our Readers, At BoyarMiller, when we partner with clients, we work as a strategic part of their business team, and that means we have to be experienced in more than just law. We also need to understand their industry so that we are able to work collaboratively with them and add value to their business. That’s why we bring together the top insights into industry trends and best practices, and deliver it to you. Not only has this information been invaluable to us and to our clients, but we hope it will be beneficial to you as well. The information in this publication has been gathered from industry-leading clients we have partnered with and from our own energy team. If you find value in it and would like to hear more, join us for our next BoyarMiller Breakfast Forum. Sincerely, Chris Hanslik Firm Chairman 1
  • 3. Table of contents Introduction State of the Industry Natural Gas Production Crude Oil Production Job Growth Expert Insights Regulatory and Political Environment Capital Markets Private Equity Investing Energy Practice Leaders 2
  • 4. Introduction Your strategic partner should be an expert in your industry, not just law. At BoyarMiller, we’re committed to providing insightful, versatile expertise to organizations of all sizes as we guide them through complex business issues. We know that in order to understand how best to collaborate with you, we need to know your industry and your business. To this end, we gathered the best insights into energy trends and best practices from industry-leading clients we have partnered with and from our own energy team. It’s our hope that the information we’ve accumulated through years of collaborative work in the energy industry will be beneficial for you. Your strategic partner requires knowledge of trends, industry and law. 3
  • 5. State of the industry The U.S. manufacturing industry is competing globally again, thanks to lower natural gas prices and a renaissance in the oil and gas energy sector, according to panelists at BoyarMiller’s “Perspectives on the Energy Industry” forum. But, while more investors are injecting capital into the industry, the lack of sensible long-term energy policy and fragile global economies continue to have an impact on investor confidence. Natural Gas Production 70 billion cubic feet per day U.S. natural gas production has increased to more than 70 bcf/d, even as rig count drops – a sign that plays are prolific and that producers are becoming better and more efficient at what they do. Cheap, plentiful supply has created energy near-independence in the natural gas realm. The market has responded by retiring coal plants in favor of cheaper coal-fired power generation; by building chemical plants and fertilizer projects; and with discussion of converting the transportation fleet to natural gas. Crude Oil Production 5 million barrels per day Reversing a 40-year decline in crude production, the U.S. has been responsible for nearly all of the net growth in non-OPEC oil supply. Onshore production has grown from 3 million to 5 million barrels a day over the last two years. Because of this increased production and the supply of crude from Canada being transported to the Gulf Coast, crude prices are low. Producers are, to an extent, suffering from their own success. However, those that transport and refine the oil are now at an economic advantage. Job Growth Oil and gas and supporting industries directly provide more than 500,000 jobs. Analysts project that number could double or triple in the coming years as production in the U.S. continues to increase. The low energy costs give U.S. manufacturing a competitive advantage, especially in industries that use oil and gas as direct feedstock. The growth of these industries will provide millions more jobs. 4 500,000 oil and gas jobs
  • 6. Expert insight Regulatory & Political Environment What sets Houston apart? Houston refineries benefit from the cheap, plentiful crude oil resources being produced and transported to our area. Companies are able to buy crude at low prices and export refined product for a significant profit. This benefits the local Houston economy as a whole, beyond those within the industry. 2013 Regulatory Trends David Pursell, Managing Director & Head of Securities, Tudor, Pickering, Holt & Co. •  eystone Pipeline or not, Canadian oil will be transported: Canadian crude oil is K coming to the Gulf Coast. The options for transportation are repair, connect and reverse existing pipes; transport on rail cars; or build a new pipeline. The best option with the least risk is the Keystone Pipeline. •  O2 emissions are down, and everyone is claiming it: CO2 emissions hit a twentyC year low in 2012 as a result of cheaper natural gas replacing coal in power generation. Although this meets environmentalist goals of lower emissions, it does not satisfy the political push toward solar and wind energy. • Government-mandated ethanol sales will drive gasoline prices up: Because companies are faced with lower demand for gasoline and higher mandated ethanol sale levels, they are forced to buy credits or export gasoline without ethanol to avoid blending more than 10% ethanol into gasoline pools. The combination will continue to drive gasoline prices up. • High crude production risks U.S. disconnecting from global prices: U.S. onshore production has increased by 2 million barrels a day over the last two years because of technology and more efficient processes. Because crude cannot be exported, it will build up on the Gulf Coast, potentially disconnecting low U.S. prices from the global pricing. As Managing Director and Head of Securities, David Pursell is responsible for TPH’s analysis of global oil & gas markets, including inventory and price forecasts, supply/demand modeling and rig count/production relationships. He is a board member of private energy companies Oxane Materials and Unconventional Gas Resources. He holds a BS and MS in Petroleum Engineering from Texas A&M University.
  • 7. What sets Houston apart? Houston’s energy capital market has grown increasingly competitive over the past several years as investment firms try to take advantage of the better economic climate in the Houston area and capture a piece of the energy market. Low natural gas prices are particularly beneficial to Houston because of its ship channel. 2013 Capital Markets Trends Tom Hargrove, Managing Director, GulfStar Group •  ipeline service companies are in a great position P In addition to the stable, recurring revenues from testing and maintenance work to keep more than 25,000 pipelines across the country meeting the demands of stricter regulations, new pipeline structure must be constructed to support growing production in unconventional gas plays. • Low natural gas prices benefit petrochemical companies Dow chemical estimates $95 billion in petrochemical plants are on the drawing board. While not all will be built, the low natural gas prices are driving significant construction and economic activity. This will benefit Houston and the Gulf Coast financially. • Middle market M&A activity is on the rise Driven by public companies whose stock prices are at attractive levels and cash balances are high, M&A activity is on the rise because of the large universe of private equity buyers with liquidity. • Lenders are increasingly aggressive Lenders have become relatively aggressive because the energy market is an area where they can actually make money, instead of lending it at low rates over LIBOR. In addition, cash flow-based lending is making a return. Tom Hargrove is a co-founder of GulfStar Group and has more than 30 years of investment banking experience. Prior to GulfStar’s formation, he served as a Senior Vice President of Rotan Mosle Inc. Tom is a director of Commercial Alliance Insurance Company and RIMCO Royalty Partners. He holds a BA in Economics from the University of Texas. 6 Expert insight Capital Markets
  • 8. What sets Houston apart? The energy industry is very large and capital-intensive, and as the national economy recovers and energy production hits record highs, there are many opportunities within the industry to put money to work. That makes it an exciting time for business, and it’s great for Houston, for Texas and for the U.S. 2013 Private Equity Investing Trends James Wallis, Vice President, Lime Rock Partners • Investors feel compelled to play the market – and that’s dangerous People are looking for places to put money, as they know idle cash is a guaranteed negative return. The problem with people stepping further and further out on the risk curve, looking for yield, is that timing the markets is incredibly difficult. Now is not the time for big, bold, market-calling bets. Diversify and proceed with caution. •  New” technologies are evolutionary, not revolutionary “ Hydraulic fracturing dates back to 1947. Newer techniques such as simultaneous fracturing, “zipper fracs,” real-time microseismic, nano-scale reservoir analysis, advanced fracturing fluids, geosteering and more have simply made producers better and more efficient at what they do. • The U.S. natural gas cost curve has been upended It is now cheaper to develop “bad” reservoirs than the “good” reservoirs. Huge, prolific and highly profitable unconventional plays are profitable at $4.50 or $5 per Mcf, whereas conventional gas strategies require $6 or $7 per Mcf to be profitable. • U.S. unconventional strategies will open up “bad rock” elsewhere The technologies and techniques that have opened up U.S. resources will be exported around the world, giving places like Russia and Saudi Arabia a chance to go beyond their substantial conventional production. It will open up a tremendous amount of supply to the world. James Wallis joined the Lime Rock Partners team in 2007 and is presently a Vice President in the Houston office. Since joining Lime Rock partners, he has primarily focused on E&P and energy service opportunities in the oil and gas sectors of North and South America. James currently serves on the board of directors of Artificial Lift Company, Braden Exploration II, Endurance Resources and PDC Mountaineer. He is also particularly involved in Lime Rock Partners’ investments in Augustus Energy Partners, Vantage Energy, and Xtreme Drilling and Coil Services. He holds a BBA from the Business Honors Program at the University of Texas. 7 Expert insight Private Equity Investing
  • 9. By BoyarMiller’s Bill Boyar and GulfStar Group’s Cliff Atherton With the ink on the 2012 election returns now dry, many people are questioning what will be the impact of President Barack Obama’s reelection and unchanged control of the Senate and House of Representatives on the energy industry capital markets. What lies ahead in the public capital markets for private equity and M&A? What can we expect from the providers of senior and mezzanine debt? Public Capital Markets The public capital markets have not been favorable for the large-cap diversified energy companies, and with the continuation of current policies, there is not much reason for optimism. A trend that can be expected to continue is limited availability of capital in the public market for energy companies other than midstream MLPs. Private Equity The substantial overhang of uninvested private equity commitments has driven substantial private equity activity and will likely continue to do so. It appears as though 2013 will continue to be an attractive time to sell or recapitalize middle market companies by accessing private equity. M&A Falling rig count, slight decline in oil prices and continued softness in natural gas prices are causing a slowdown in E&P activity. The recent surge of drilling activity in areas where there is no transportation infrastructure has redirected investment activity to midstream – in fact, 55% of all M&A deals in second quarter last year were midstream deals. Senior and Mezzanine Debt The availability of senior and mezzanine debt continues to be the key driver of overall transaction activity, and is particularly crucial for valuations in middle-market deals. Senior lenders are managing regulatory pressure and tight credit requirements. In conclusion, while public markets are likely to be weak, private equity firms will continue to look for companies and management teams to support. The M&A markets can be expected to be strong, and debt markets will remain open but be characterized by conservative underwriting and regulatory pressure. For more detailed information about the state of capital markets, read the full article. 8 Expert insight Current State of the Capital Markets
  • 10. Energy Practice Leaders Chris Hanslik Firm Chairman Represents companies in all aspects of the energy sector, both domestically and internationally, in disputes ranging from breach of contract and fraud to misappropriation of trade secrets and employment related disputes. Has secured favorable results in both state and federal courts, as well as international arbitration proceedings for energy clients. Gary Miller Chairman, Business Group Represents numerous domestic and offshore-based companies in connection with acquisitions and divestitures, financings, joint ventures and general corporate matters in the United States. Bill Boyar Shareholder, Business Group Represents the various parties involved in the acquisition, disposition, capitalization and financing of national and international businesses. Served as lead counsel for numerous complex, multi-party acquisitions and project financings with significant experience in corporate finance, mergers and acquisitions, private equity and structured finance. 9
  • 11. Represents multiple international energy and energy services clients with outbound expansion (i.e., U.S. companies expanding internationally) and inbound expansion (international companies expanding to the U.S.), including start up expansion or expansion by acquisition, as well as in connection with financing and merger and divestiture transactions. Gus Bourgeois Shareholder, Business Group Represents clients doing business domestically and internationally in connection with mergers and acquisitions, customer and vendor contracts - including master services agreements - technology licensing, employment agreements and related matters. Craig Dillard Shareholder, Litigation Group Handles litigation in both state and federal courts, as well as on appeal, for both domestic and international oil and gas clients who have been sued in the United States or in arbitration. Specializes in litigation of commercial contracts, including indemnity obligations; technology protection, including trademark infringement claims, trade secret misappropriation claims and intellectual property disputes; and, enforcement of oil and gas companies’ non-compete, confidentiality and other employment agreements. 10 prac tice Leaders Steve Kesten Shareholder, Business Group
  • 12. BoyarMiller 4265 San Felipe, Suite 1200 Houston, Texas 77027 TEL 713.850.7766 FAX 713.552.1758 boyarmiller.com Our lawyers, both corporate and litigation, have a thorough knowledge of providing services for both domestic and international companies in the energy industry. Continuous advice to multinational energy companies including advisory work, transactions, mergers and acquisitions, employment matters and litigation. Extensive experience with negotiations, disputes and advice on a variety of offshore and oil field services contracts – master service agreements, terms & conditions, framework agreements, etc. Experience working with contracts developed by (or for) major contracting companies.