oil, gas bankers may have more bite in 2016 - Rigzone

DECEMBER JULY 2015 2015

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OIL, GAS BANKERS MAY HAVE MORE BITE IN 2016 06

COP21 AND THE AGE OF GAS 14

FOREIGN INVESTORS MULL NEXT STEPS FOLLOWING MYANMAR’S ELECTIONS

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JULY 2015 CONTENTS

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OIL, GAS BANKERS MAY HAVE MORE BITE IN 2016

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COP21 and the Age of Gas

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When Even The Sweetest Crude Tastes Sour

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It’s Giving Season: Hilcorp Rewards All Employees with $100K Holiday Bonus

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2016: Fear And Hoping in the Oil Patch

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Foreign Investors Mull Next Steps Following Myanmar’s Elections

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Tudor, Pickering Reveals Differing Costs of Various Shale Plays

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DECEMBER 2015 EDITION

ASST. EUROPEAN EDITOR

RAndreasEExarheas A

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CAREERS EDITOR

MANAGING EDITOR

Valerie Jones

Saaniya Bangee

SENIOR EMEA EDITOR

DESIGNER

Jon Mainwaring

Marcus Tenette

APAC EDITOR

CREATIVE DIRECTOR

Chee Yew Cheang

Eric Duenas

SENIOR EDITORS

VP CONTENT

Deon Daugherty Karen Boman

Bertie Taylor

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DECEMBER 2015

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Oil, Gas Bankers May Have More Bite in 2016 Deon Daugherty, Senior Editor

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@Deon_Daugherty

nterest in reserve based lending (RBL) and base

Turned out, the average cuts were again between 5 and

borrowing redeterminations (BBR) probably got

10 percent. And while that’s an average, meaning some

more ink – at least in the energy press – in 2016

folks were cut higher, it still wasn’t the bloodletting expect-

than anyone’s seen since shale first rocked the world. Neither was a new concept to bankers or the oil and gas companies that use them to capitalize on funding expensive projects and technology. But RBL and BBR took on heightened urgency this year.

ed. Now, the experts say RBL and BBR will really be in trouble in spring 2016. So, you might ask, what exactly is going on here. The industry was scared during both redeterminations in 2015,

It was the downturn’s fault. In 2014, commodity prices

but – apart from companies that simply couldn’t handle

began a precipitous fall. In the following months, rapidly

their balance sheets in a downturn – credit accounts have

declining oil prices and asset devaluation spooked many

largely remained unscathed. Is someone crying wolf, or

companies destined to convene with bankers – and for the

has paranoia sunk into the industry?

first time, regulators – for scrutiny of their biannual creditto-debt ratios. This spring, energy companies and their lawyers were

When he returned my panicked call to his cell phone, Skip York, vice president of integrated energy at Wood Mackenzie, set me straight.

nervous when bankers opened the books to look at what

As it turns out, like just about everything else in the en-

exactly was going on. Turned out, by and large, it wasn’t as

ergy space, it comes down to fundamentals – specifically

bad as most expected. Credit was generally cut between 5

here, oil prices.

and 10 percent.

Banks use a metric based on oil prices 12 months behind

The threat was put off another six months. But during

the covenant date. So when they were looking at where to

that time, oil prices and asset values continued their de-

put money this spring, they were looking at prices from

scent. As the October evaluation drew near again, it

last spring when oil was trading close to $100 per barrel.

seemed time to fear the reaper. Credit cuts expected in the

In the fall redetermination, prices analyzed were lower be-

ballpark of 30 percent or more again sent the industry into

cause the downturn had started, but they were still in the

something of a tizzy. Those companies dependent on the

$60s and $70s per barrel.

generosity and faith of banks – especially small independents and service companies – renewed their worrying.

But in March 2016, there will be more $40 oil in the mix, and that’s what changes the equation and can make all the difference next year for energy companies on the brink.

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DECEMBER 2015


COP21 and the AGE of GAS W

Jon Mainwaring, Senior Editor, EMEA

@oiljon

hether you believe Mankind

Producers said the agreement was con-

sions. The COP21 agreement should see

is having a significant effect

sistent with its policy on climate change,

developed countries around the world

on the planet’s climate or

“which recognizes the inherent risks of

attempt to achieve a similar scale of car-

not, the recent COP21 meeting in Paris

greenhouse gas emissions”, and made the

bon emissions reduction while developing

showed that many governments and

point that “burning natural gas for pow-

nations will also have to be careful about

other powerful institutions are convinced

er generation is a pragmatic and efficient

the growth in their emissions if they are to

that our increasing use of carbon-based

way to reduce … emissions”.

abide by the agreement.

The IOGP went on to state that oil will

But this seems like a tall order. Although

major factor behind global warming. The

also remain essential for the foreseeable

one should never underestimate human

meeting saw the world’s governments

future because it has no practical rivals in

beings’ ingenuity when it comes to tech-

agree to cut carbon emissions in order to

three crucial applications: lubricants, feed-

nological development – perhaps we may

try to hold global warming to below two

stock for products such as fertilizers and as

be able develop sufficient reliable, on-de-

degrees centigrade.

a transport fuel (particularly in aviation).

mand energy sources that emit no carbon

fuels since the Industrial Revolution is a

Hailed by environmentalists around

In the UK, the last Labour government’s

gases by 2050 – projected economic de-

the world as a step in the right direc-

2008 Climate Change Act committed the

velopment in what were once regarded as

tion, oil and gas producers also wel-

country to reducing its carbon emissions

Third World countries suggests that fossil

comed the COP21 agreement. The In-

by at least 80 percent by 2050 when com-

fuel usage by mid-century could well be

ternational Association of Oil & Gas

pared to the country’s 1990 carbon emis-

far greater than what they use today.

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Out of curiosity I recently tried out an

I don’t feel a huge amount of guilt about

Unless there is a major technological

online “carbon footprint calculator”

this. For a start, I know plenty of people

innovation in how we humans produce

operated by the WWF. A rather rough-

who are on a plane somewhere almost

the bulk of our energy, such as the inven-

and-ready tool, it involves spending five

every week and who drive much more fu-

tion of some kind of nuclear fusion-based

minutes of your time to input such things

el-inefficient cars. But there is also the fact

power plant, it seems that today’s renew-

as non-business flights you have taken

that for every First World consumer like

ables – and even existing and promised

during the past year, how you heat your

me there will be dozens of people around

nuclear power plant – will not be enough

home, how often your drive your car, and

the world who travel very infrequently

for us to forgo fossil fuels completely.

so on. I scored 213 percent (which means

and, when they do, they don’t travel far,

And this means we have to be smart

that if everyone lived like I do we would

and neither will they run cars or own

about which fossil fuels we burn. Of the

need 2.13 planets).

energy-hungry washing machines and

three main fossil fuels, natural gas appears

fridge freezers.

to produce the fewest carbon emissions, so

I put this score down to the two long weekends I spent in New York this year

Yet economic growth in the develop-

using gas to replace oil as the main trans-

as well as a flight I took to Croatia for

ing world means that within a generation,

portation fuel, while replacing coal and oil

my summer holiday (when I included

there will be hundreds of millions more

with natural gas for electricity generation

the flights I took to attend conferences

people who will take for granted their cars,

as well as for a wide range of industrial

for Rigzone in 2015 I scored closer to

long-haul flights and the white goods in

processes, looks to be the future. COP21

400 percent).

their homes, just as I do now.

confirms that we’re embarked on the Age of Gas.

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DECEMBER 2015

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When Even The Sweetest Crude Tastes Sour Deon Daugherty, Senior Editor

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@Deon_Daugherty

il and gas companies going hat-in-hand to the capital markets and private equity funds are finding themselves in a tougher negotiating position after a consistent year of all-around poor market performance. At the beginning of 2015, there was plenty of interest in the capital markets to invest in oil-related stocks, whether it was oilfield services companies, upstream, midstream and throughout the industry, Bob Gray, a corporate transactions lawyer at Mayer Brown LLP in Houston, told Rigzone. “They did, and they got burned,” Gray said. “And there’s also a whole bunch of money that came in through private equity, and they got burned because everybody expected the value of WTI was going to shoot back up and things were going to get rosy again. But that has not happened.” And so The Street, at the moment, has lost interest in energy. That’s certainly brought changes to the mergers and acquisitions cycle. As Charles Kelley, lead partner in the litigation and dispute resolution site at Mayer Brown, explained, investors are often bullish on debt-acquisition where they can buy second liens or first lien debt and make a purchase at a discount for the whole position in the hopes that they can then recover higher values. Instead, even among the most successful players in private equity, such as Apollo Global Management, Cerberus Capital Management, Oaktree Capital and Silver Point Capital, the returns have been dismal. They’ve all traditionally been shrewd purchasers who come in at the right time, Kelley said, and yet some have taken positions believing the industry had reached the bottom and the time to buy was right. Within months – and in some cases, weeks – they’d realize they paid too much and lost money on the deals. “That’s what I’ve heard – again and again – even last week, from Wall Street,” Gray said in early December. They “got burned last year and again this year, and, ‘We’re not going there. We thought we knew [oil and gas], but we don’t know the industry.’ And that’s really what it is, they don’t know the industry.”

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DECEMBER 2015


It’s Giving Season: Hilcorp Rewards All Employees with $100K Holiday Bonus Valerie Jones, Careers Editor

@rz_careernews

N

othing says Happy Holidays like an extra

es for Millennials” in 2015 and ranked #20 on Fortune’s “100

$100,000 in your pocket. Employees at Hous-

Best Companies to Work For” list in 2015 – the company’s

ton-based Hilcorp. Co., a privately-held oil

third consecutive year making the list. Judging by that, it

and natural gas exploration and production company, can

seems as if Hilcorp may be an okay place to work. Of course,

vouch for that.

I don’t work there so I cannot say that with 100 percent cer-

As a holiday bonus, every Hilcorp employee – yes, all 1,380 of them – received $100,000, reported Fox4News. The

tainty, but … seriously, a bonus to the tune of $100K? I think I could find a reason or two to smile.

hefty bonus was awarded because the company met a goal

It’s been a tough year for the oil and gas industry, and that’s

of doubling its size over a five-year period, according to the

putting it lightly. So, if for nothing else, this story was touch-

news station.

ing and reminded us that yes, good things are still happening

Though there was no response for my requests for com-

in this industry – and the timing is great. Hilcorp reception-

ment from Hilcorp, I understand why. When a company

ist Amanda Thompson told the news station it was surreal

does something positive, it’s always best if it’s a selfless act

and “a dream come true” when she received the bonus.

– sending out press releases and doing dozens of interviews

Regardless of whether employees choose to use their bo-

doesn’t always come across as selfless. Besides, local media

nus to retire, vacation, make a special purchase or simply

and national news outlets spread the word for them.

tuck it away in their bank account, arguably the gesture

Hilcorp was ranked #36 on Fortune’s “100 Best Workplac-

couldn’t have come at a better time … or in a better industry.

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11

2016: Fear And Hoping DECEMBER 2015


in the Oil Patch Deon Daugherty, Senior Editor

I

@Deon_Daugherty

t was the worst of times. And then it really kinda got worse.

Deloitte LLP’s John England, vice chairman and

• Chop capital expenditures (CAPEX) and defer high dollar projects • Cut operating costs and headcounts

U.S. Oil and Gas Leader, offered his reflections on

• Press supplies for discounts

the year and outlook for 2016 in a brief white paper

The first items have been predictably effective.

released Dec. 10. What it all comes down to is this:

But England has a new idea, though it’s still in prog-

Within the space of a year, revenue at exploration

ress: hope.

and production (E&P) companies plunged 50 percent. The industry, a pursuit long valued by the wild-

And although his idealism is often enough answered, “Hope is not a strategy,” it sure beats, “No hope,” when it comes to morale, he said.

catters, the mavericks and certainly not for the

Without spending too much time spinning his

faint of heart, has managed the troublesome real-

wheels on what’s already gone down in 2015 – pric-

ity that not only confronts it in the year ahead, but

es, headcount, production – England laid out what

continues to envelope it. As oil prices have dipped

had been expected as 2015 spiraled downward,

in December below $40 per barrel, denial, anger,

but didn’t actually occur. Specifically, a tidal wave of

bargaining, depression and finally, acceptance have

M&A (mergers and acquisitions) and bankruptcies,

crept in, he said.

deteriorating U.S. oil production and a spike in in-

Upstream companies have pulled out their dog-

terest rates.

eared playbook from previous earlier severe declines:

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Consequently, 2015 is ending pretty much the way it started.

And, harkening back to hope, England noted there are some positives. However slight and not

“What’s different? No one believes prices are

from China, there is Asian demand; production

going up much any time soon, so people are

decline simply from natural reservoir behavior,

battening down the hatches like a hurricane is

and the potential for ultimately, a more compet-

coming,” he wrote, adding as an aside that he’s

itive industry.

well-stocked on batteries and bottled water. Still, England noted the relative resilience of the natural gas side of the business. The natural gas “value chain from wellhead to

“More than anything else in business, I believe in the power of free markets,” England said. “The endgame is an oil and gas industry that will stronger, leaner and built to last.

burner tip seems to be thriving in an extended

Or, in the words of a phrase repeated so often

moderate price environment,” he said. “This

during times of trouble that we can’t quite pin

begs the question – are there lessons learned to

it down to the original source, the industry can

draw from oil?”

always, “Hope for the best and prepare for the worst.”

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DECEMBER 2015


Foreign Investors Mull NextSteps Following Myanmar’s Elections Chee Yew Cheang, APAC Editor

F

@cheeyew_cheang

oreign investors, including

impoverished country to foreign invest-

President Aung Tun Thet told MT, add-

those in the petroleum indus-

ments from around 2010 following de-

ing that “economic sanctions may well be

try, are mulling over the next

cades of military rule.

lifted, after which the country will gain

steps in Myanmar after the opposition

Still, the cloud of uncertainty in the

National League for Democracy (NLD)

run up to the Nov. 8 elections had a

– led by Nobel Laureate Aung San Suu

dampening effect on external funds

Kyi – cruised to a landslide victory in the

flowing into Myanmar.

Nov. 8 parliamentary elections.

many opportunities … It is an opportunity to take advantage of this change”. But questions still linger on the policies of the incoming NLD government,

Foreign direct investment (FDI) fell

including its economic plan. Moreover,

As the laborious vote counting pro-

slightly to $3.7 billion in the first sev-

investors are interested to know who will

cess drew to a close, two weeks after the

en months in the financial year (FY16)

be the key government appointees as well

polls, results showed that the NLD had

ending March 31, 2016, down from $3.9

as the reaction of Myanmar’s military es-

captured 225 of the 440 seats contested

billion a year ago, MT reported Nov. 26,

tablishment as it adjusts to the changed

for the House of Representatives (Lower

citing data from the Directorate of In-

political order.

House) and 135 of the 224 seats in the

vestment and Company Administration

House of Nationalities (Upper House),

(DICA).

figures compiled on Nov. 24 by Myanmar

“Nobody really knows what to expect from her (Aung Sang Suu Kyi) and the

DICA’s Director General Aung Naing

new government … It’s up to her to show

Oo told MT the FDI slowdown in months

in the next six or seven months that she

The new parliament, including mili-

prior to polling day was due to investors

actually has an economic policy and can

tary appointees, will select Myanmar’s

holding back because they wanted great-

bring in enough qualified people to gov-

next President – most likely a NLD can-

er political clarity before committing to

ern,” Giulia Zino, a senior analyst for

didate given the party’s majority – in

any new projects.

Southeast Asia at Control Risks in Singa-

Times (MT) indicated.

early 2016 to succeed incumbent Thein

That may change now given wide-

Sein. President Thein Sein has to some

spread global support for Aung San Suu

extent facilitated the opening up of the

Kyi’s NLD, Economic Adviser to the

pore said, as cited in a Nov. 17 report by Bloomberg. Still, the report added that NLD’s sixpoint economic framework, as stated in the party manifesto, called for the adoption of policies “in line with international norms and standards to increase

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foreign investment.” That could enhance

Myanmar in late November, state media

Myanmar Petroleum Exploration &

Myanmar’s business appeal, including

said in a statement, as reported by MT

Production Co., Ltd. (MPEP) an affiliate

petroleum firms keen to venture into the

Nov. 19.

of MPRL E&P Pte Ltd., is the local part-

under-explored country or increase investments there.

BG will deploy the Ramform Sovereign vessel for 3D seismic surveys in

ner of BG and Woodside in these four offshore blocks.

After all, oil and gas featured quite

Blocks A-4 and AD-2 in the Rakhine Ba-

In late October, Chevron Corp.’s unit

significantly in Myanmar’s investment

sin off the west coast of Myanmar from

Unocal Myanmar Offshore began ex-

landscape. The sector remains the coun-

November 2015 to April 2016, while

ploration activities in Block A-5 in the

try’s largest source of FDI in the first sev-

partner Woodside will carry out similar

Rakhine Basin with the Viking Vision,

en months of FY16, accounting for $2.05

work using the Ramform Titan vessel in

and 3D seismic surveys are scheduled to

billion or almost 54 percent of the total.

Blocks AD-5 and A-7 during the same

be completed toward the end of January

period.

2016.

Meanwhile, it’s oil and gas exploration season in Myanmar currently. BG

“The four blocks cover a total area of

More exploration work in the coun-

Group plc and Australia’s Woodside En-

nearly 11,583 square miles [30,000 square

try is expected, especially in 2016 and

ergy Ltd. – two successful foreign bid-

kilometers], which is why the seismic

2017, as winners in the Myanmar 2013

ders in Myanmar Offshore Bid Round

surveys will take around six months,” an

Offshore Bid Round undertake seismic

2013 in which 20 blocks were awarded

official of state-owned Myanma Oil and

work in the 20 shallow-water and deep-

– will commence offshore exploration in

Gas Enterprise (MOGE) told MT.

water blocks.

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DECEMBER 2015

Tudor, Pickering Reveals Differing Costs of Various Shale Plays RZNEWS DIGITAL READER

Deon Daugherty, Senior Editor

A

@Deon_Daugherty

s exploration and production companies con-

Tiers 1 and 2 on the east side of the Permian, and on the

tinue counting their quarters and contemplat-

western Delaware side, $50 oil was needed to make a profit.

ing the future, we take a look at a piece of Tu-

The Midland Wolfberry region was less developed and need-

dor Pickering Holt & Co research from April that may help us anticipate where the shale action will happen next year.

ed a minimum $60 barrel of oil. The Mississippi Lime, Eagle Ford Tier 3 and Uinta Basins

While these price points are from the spring, they provide

were lumped closely together in the $65 per barrel range.

a snapshot of what operators are confronting when they de-

And topping $70 per barrel, the Tuscaloosa Marine Shale re-

cide where to spend their drilling capital.

quired the highest oil prices to turn a profit.

Given the price required for a 10 percent after tax rate of

No doubt, there are a variety of factors that figure into the

return (ATROR) with a 20 percent cost savings, TPH found

cost benefit analysis of a particular play. TPH associate Jeof-

this spring that among the least expensive basins to drill –

frey Lambujon told Rigzone that on the capital expenditures

between $35 and $40 per barrel to turn a reasonable profit

(CAPEX) side, operators must consider the depth of which

– are in particular areas of the Eagle Ford; the Bakken; and

to drill, the life cycle of the play, completion recipes, days

the Three Forks Sanish, which is in the upper part of the

required to drill and contracts.

Bakken. Ironically, depending on where you’re drilling in

In the heady days of 2014, Lambujon said that when drill-

the Eagle Ford and the Bakken, the oil price to turn a profit

ers were considering their budgets, one of the major themes

grew more step, well into the $60-plus barrel range.

was to increase the well cost as a result of pumping more

The Permian Basin, an expansive play that includes areas

frack fluid to increase production.

described as “Midland” and “Delaware,” runs the gamut of

“Even with the downturn ongoing, some operators are still

prices needed to be profitable. In the Midland Wolfcamp

increasing the amount of fluids in their wells as the incre-

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mental cost may be outweighed by incremental productivi-

in April 2016, as it reflects the relative economics across the

ty,” he said. “Those increased costs are offset by efficiencies,

different plays.

[such as] crews drilling the wells faster, the ability to share

“In general, an approximate 10 percent reduction in well

common facilities as infrastructure, such as roads or storage

costs equates to about a $5 barrel reduction in the breakeven

units, or general fine turning of the processes.”

price,” he said.

Lambujon said the research team will revisit the basin costs

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