The US manufacturing sector 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 recent "Perspectives on the Energy Industry" forum. In addition, the petroleum and petro-chemical transport sector is thriving.
But, while more investors are injecting capital into the industry, the lack of sensible long-term energy policy and fragile global economies continue to impact investor confidence.
"The energy industry is a significant driver for Houston's growth and an important part of our practice," said Bill Boyar, BoyarMiller's founder and former chairman. "We host the Energy Forum each year providing current trends and developments to help our clients stay ahead of the curve and make smart, informed business decisions."
Held at The Houstonian Hotel in Houston TX, BoyarMiller's program featured David Pursell, managing director and head of securities with Tudor, Pickering, Holt & Co; Tom Hargrove, managing director with GulfStar Group; and James Wallis, vice president of Lime Rock Partners.
Pursell called for the construction of new pipeline in the Keystone project. "Reversing the flow in segments of existing pipeline rather than building new pipe according to specifications is insufficient," he said. "A significant amount of the heavy crude from Canada is already being transported to the Gulf Coast by rail and that will continue for the next decade."
Carbon emissions reached a 20-year low in the first quarter of 2012, and the United States has seen reduced CO2 emissions in the last five years, Pursell said. This is due to less expensive natural gas replacing coal for power generation.
"For years we couldn't grow natural gas production and now we are doing it with fewer and fewer rigs," he said. "This is the best thing that has happened to the US economy, especially in the manufacturing sector driven by natural gas and electricity, making it cheaper and globally competitive."
Federal law prohibits the export of domestic crude oil, Pursell said. The increased supply, combined with the export ban means there will be a disconnect between the pricing of crude in the United States and everywhere else. US crude oil will become cheaper and the refiners can export refined product, which is good for the Gulf Coast refineries and the Houston area.
"The producers are becoming victims of their own success, making less money due to the increased supply of oil and natural gas," Pursell said. "The people who will profit are companies who transport and refine it."
Hargrove discussed the state of capital markets in the energy industry. Middle market M&A activity is driven by public companies, whose stock prices are at attractive levels and who have high cash balances; private equity buyers with large amounts of liquidity; and lenders, who are becoming aggressive again with cash flow-based lending. These activities contributed to a growing number of transactions in 2012--which surpassed the number of deals in 2008--and a growth in transaction multiples, which have recovered from a drop in 2009 and now average 6.2 EBITDA in the middle market. Many transactions were completed in the fourth quarter of 2012 because of the pending increase in the capital gains tax in 2013.
"An estimated 80% of the wells are now non-vertical and from the capital standpoint, horizontal drilling requires more equipment, services, and people than vertical drilling," Hargrove said. "The Gulf of Mexico has recovered from the Deepwater Horizon spill with increased activity in deep water exploration. We see new rigs moving into the market and once-rare deep water production platform orders are now on backlog.
"There is a huge demand for capital from pipeline service companies. The introduction and enforcement of stricter US Department of Transportation regulations; heightened concern over pipeline safety and maintenance after several high profile incidents; the adoption of the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011; and the required hydrostatic testing and repairs on all pipelines constructed before 1970 all contributing to stable recurring revenues from maintenance.
"New pipelines are needed to transport product from the unconventional oil and gas fields from production areas to processing facilities. Pipeline construction miles are projected to increase to approximately 41,000 in 2013, up from 36,000 in 2012, and total pipeline construction expenditures are expected to reach $41 billion in 2013--a $7 billion increase from 2012.
Hargrove added: "Petrochemical and refining services are benefitting from low natural gas prices and are experiencing robust growth. While increased domestic oil availability is providing domestic refineries with price advantaged crude oil, it requires capital investment in plant retrofits to process light crudes. Other investment factors include rising global demand for refined products, attractive economics for US petrochemical plants, and a continued aging of current infrastructures. Capital spending is anticipated to reach $17.6 billion in 2013 and grow to $19.9 billion by 2017, with a lot of development in the Gulf Coast.
"A Dow executive recently said that an estimated $95 billion worth of processing plants are planned domestically. Much of the new construction will happen in the Gulf Coast petrochemical complexes, close to the (Houston) ship channel, as US refineries and chemical plants contract for domestic oil and gas as a secure source of supply with attractive prices. It's a very active marketplace and a very good time to be in our business in Houston."
Wallis addressed the issues facing private equity investors in the energy industry. "Investors still face a lot of uncertainty due to fragile global economies, a slow US recovery dependent on fiscal stimulus, and worldwide governments and politicians hurting the private sector's confidence," he said. "Trying to time the markets is incredibly difficult, so it's important to proceed with caution and to seek diversification of timing, geography, and commodities within the energy sector specifically."
Despite the sluggish economy and political uncertainty, a renaissance in the US oil and gas industry is underway, according to Wallis. "We've all heard the news,” he said. “The industry has reversed a decades-long trend of declining crude oil production, and natural gas production continues to grow despite a significant drop in its pricing and the number of rigs drilling for it."
Horizontal drilling and hydraulic fracturing technology is not new, Wallis said. More than one million separate fracturing jobs have been conducted since 1947, and as those technologies have evolved, the use of horizontal rigs is on the rise. These rigs now make up more than 60% of all rigs drilling in the United States today, compared with about 10% in 1991.
Recent advancements such as simultaneous fracing, real-time microseismic monitoring, nano-scale reservoir analysis, and pad drilling individually are evolutionary rather than revolutionary, but combined have made a big impact on the industry's understanding of tight reservoirs and its ability to develop "bad rock" more efficiently, Wallis said. The end result is a dramatic increase in the amount of oil and gas resources that can be profitably developed today.
The United States is on its way to energy independence or at least significantly diminished energy dependence, he said. It is projected that North America will be energy self-sufficient by 2022 and the US economy will see great benefits as a result. Direct jobs within the oil and gas industry could double from almost 500,000 today as several hundred billion dollars of new capital is invested in wells, pipelines, and supporting infrastructure over the next decade. The indirect benefits to the entire US economy from lower energy prices will be far-reaching as well.
Decreased dependence on energy imports will lower our foreign trade deficit, strengthen the US dollar, and will have implications for foreign policy. "The United States is becoming more self-reliant," Wallis said. "Our technologies and techniques will be exported, and tight oil will fill a really big gap in future global supplies that existed previously. It is turning into a big solution for the United States and the world and that's good for everybody."