HOUSTON, April 29, 2019 /PRNewswire/ -- Shifting oil and gas industry forces mean that capital discipline, decreased spending and consolidation will continue to mark the industry in the coming years, say oil and gas and finance executives addressing about 150 attendees at the annual BoyarMiller Energy Breakfast Forum.
"Our speakers agree that we are currently in the middle of the latest oil and gas cycle and while oil prices have been recovering, there are substantial changes taking place that will have a long-term impact on the industry," said Chris Hanslik, chairman of BoyarMiller. "Our moderated discussion was packed with an inside look at the challenges and opportunities occurring within this vital industry to Houston."
The three speakers at the BoyarMiller Energy Forum included Laura Schilling, president of Pumpco Services; Matt McCarroll, chairman and CEO of Fieldwood Energy LLC; and James P. Baker, managing director and global co-head of investment banking and capital markets at Piper Jaffray & Co.
Call for capital discipline
"What's happening right now is that oil prices have been recovering since the lows of last December, but E&P spending is actually down in the US onshore market year over year," said Schilling of oilfield services (OFS) company Pumpco Services. "And even though there is a constructive trajectory of oil prices for the rest of the year, there is a call for capital discipline to the E&P companies, as well as OFS, to drive greater cash flows which is changing the dynamics of this cycle. Investors are voting with their wallets and energy is currently less than six percent of the S&P 500."
Schilling said both the operators and the OFS segment of the industry are expected to provide investors and shareholders a return through dividends and buy backs, and OFS companies with debt are working to improve balance sheets.
"The focus in OFS right now is free cash flow and that is how we are going to bring investors back and build sustainability," said Schilling.
To do that, Schilling said the OFS sector has to embrace a "new normal" that could be different from the previous business models.
"You either have to work the efficiency side of the business, like a Southwest Airlines model, or you need unique technological differentiation. In the completions market, there are a lot of players and those in the middle that do not differentiate will not survive," said Schilling. "We are focused on efficiency. Given the rising complexities of wells today, some of this is back to the basics of performing well for operators and that will continue to earn market share going forward."
A tipping point
Schilling also said the industry's new normal includes the adoption of "big data" as operators work with Google, Amazon and Microsoft to gain information about improvement of field operations, equipment, and well management.
"Integrating data and algorithms from these companies into operations improves decision making and is going to be essential in the future as operators strive to reduce costs," said Schilling. "We have sensors on much of our equipment for predictive maintenance and real-time analytics and it has been phenomenal. The tipping point is here in utilizing new software, cloud platforms for remote operations, and other technology—and it's exciting to see."
Even with the industry's advancement of technology and adoption of big data, Schilling said there is still one key component to success.
"Execution matters. For instance, at the Permian Basin there are multiple vendors operating onsite and activity must be coordinated to move massive pieces of equipment every day to achieve efficiency for the operator, and to do it safely," said Schilling. "So technology is important but execution wins the game."
Segmentation and spending
Matt McCarroll of Fieldwood Energy believes the industry is more segmented today and cited his private company as an example of how it is different from large and onshore operators.
"We are going to spend more capital during the next 12 to 18 months than we have spent over the last five years," said McCarroll who attributed increased spending to the company's work in the deepwater Gulf of Mexico that will amount to 50,000 barrels of production over the next two years. "But it is a challenging time. You won't ever see again the activity levels of 2005 when there were 80 active operators in the Gulf. At the Gulf of Mexico lease sale a few weeks ago, there were only 30 companies that made bids. There has been a lot of consolidation and the industry in the Gulf has fundamentally changed."
He addressed the concerns about efficiency among operators citing services provided at a reduced day rate are only effective if executed safely and efficiently.
"While costs have come down substantially, and day rates have dropped, if it takes twice as long to drill because the equipment has not been serviced recently or the crew is not well trained, there are no savings. People misconstrue that because rates are down, there is more money being made," said McCarroll. "We look for the highest quality vendors that will help us produce most efficiently."
McCarroll also addressed the challenges private producers face in planning a profitable exit strategy.
"The traditional exit for private equity is a strategic buyer or going public, but it is difficult to go public today. As a private company with stakeholders, including private equity, you need liquidity at some point. We are looking at different options to reach that goal," said McCarroll.
McCarroll doesn't make predictions about oil prices and said you can get caught up trying to over-analyze oil prices. "If I knew where oil prices were going I wouldn't be producing it, I'd be trading it," he joked with the audience.
Shifts in funding
James Baker of Piper Jaffray & Co. addressed the new landscape for buyers and sellers in the midstream sector.
"The biggest change in the midstream space is that 10 years ago the vast majority of buyers were master limited partnerships or MLPs," said Baker. "Since 2017, we have seen about $50 billion worth of mergers and acquisitions in midstream; approximately $40 billion of it has been financial buyers with $10 billion representing strategic buyers."
According to Baker, the industry is seeing a market trend where MLPs are converting to C Corps because of the sharp reduction in the U.S. corporate tax structure and the ability to access a larger base of institutional investors. "It's a much bigger pool for companies when they get back to growing and need to raise capital," he said. "But many institutional investors look at the industry and say there are too many midstream companies that look the same and there needs to be consolidation—and that's not an easy solution."
"The entire business model has changed for upstream private equity groups," said Baker. "Traditionally, they have backed a management team to go out and lease acreage, prove it, and then flip it to a strategic. That market has disappeared. Now they have to hire operators and run it as a company and within cash flow or maybe push until an exit appears. It's a totally different approach."
Baker concluded stating the investment community has shifted from a focus on growing production, to a focus on capital discipline and financial metrics that require a different mindset.
For more information about the BoyarMiller Energy Forum, visit boyarmiller.com.
About BoyarMiller
BoyarMiller is a mid-size Houston-based law firm that advances client business goals by bringing new possibilities into focus with confidence and clarity to achieve extraordinary outcomes. Since 1990, we have been providing practical and smart business solutions. Our firm is comprised of two practice groups—business law and litigation—and we serve multinational companies, middle-market businesses and entrepreneurs in need of collaborative and strategic representation. See boyarmiller.com for more information.
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