Slava Slavinskiy, head of Europe, Middle East and Africa energy banking for Citi, says the public market is very favorable for E&P activity.
For Societe Generale (led in North America by Houston-based Jason Henderson), London-based Kevin Price is managing director and head of reserve-based lending; Marie-Aimée Boury is managing director and deputy head, reserve-based finance, EMEA. SocGen was a lead banker in a $5-billion facility for Anadarko Petroleum Corp. and, for Perenco, it put together a $2.8-billion bank facility.
For private-equity firm Lime Rock Partners LP (led in the U.S. by co-founders Jonathan Farber and John Reynolds), managing director Trevor Burgess manages its European office from Aberdeen. Recent Lime Rock successes have included the sale of Houston-based portfolio company Allis-Chalmers Energy Inc. to Norway-based Seawell Ltd. for $890 million. The combined entity is now known as Archer Ltd.
Oil and Gas Investor visited with each of these capital providers recently, discussing the outlook for exporting U.S. unconventional-resource technology overseas, the level of comfort abroad with investing in energy, and whether there is perceived to be greater potential for reward from funding North American or non-North American business models.
Here, Slavinskiy, Price, Boury and Burgess describe their views of North American and global energy dynamics from their vantage point in Europe.
Investor: Is there potential for meaningful export of unconventional-resource-exploitation technology to basins outside North America?
Slavinskiy: The technically recoverable gas reserves in the Top 32 countries is about 600 trillion cubic feet. Shale-gas discoveries in this same set of countries would increase this number 40%, so it is absolutely a massive enhancement to the global resource base.
But these technologies, while transferable in the physical sense, are not necessarily transferable in the political sense. Lots of European Union countries, for example, are resisting those technologies as environmentally unfriendly. You have vast areas of lightly populated areas in the U.S. and Canada; but, when Europeans see a rig in their backyard, they are clearly unhappy, so there will be some opposition. A lot of industry members are not expecting massive shale-gas development in the densely populated areas of Western Europe.
Lime Rock Partners LP managing director Trevor Burgess says the Macondo incident has created service and technology opportunities.
But in places like Poland, for example, where the country strives to diversify its gas supply, there will be a strong incentive to try to deploy shale-gas development technologies. Poland is probably as close as it will get to full-scale development in Europe.
Burgess: At Lime Rock, we're not making any shale-gas investments at the moment outside North America. We're looking at more conventional operations, such as field-rehabilitation projects and also potentially at coalbed methane. When you look at shale gas in Europe, it's still very early days. There has been a lot of talk about Poland and some independent companies have been drilling there. But we haven't seen any firm results from shale gas in Europe.
Even in North America, it isn't as simple as taking technology used in one area and applying it in another. Each area has to find its solution. But there is a lot of excitement. I think everyone is looking for shale-gas opportunities, but right now we are more focused on E&P investments that are closer to commercialization.
Investor: U.S. producers are applying horizontal wellbores and multistage fracture stimulation to conventional formations, such as the carbonate, liquids-rich Mississippi Lime in the Midcontinent. Do you have clients looking at doing this too?
Price: We have seen SocGen clients improve production rates by using horizontal and fracing techniques in reservoirs that were producing but not at a high rate. They are starting to improve production by using these techniques.
Investor: Are your conventional-resource clients expanding their conventional plays?
Price: The lending we do in North America tends to be for onshore-focused companies, since most of the E&P business in America tends to be onshore, while many of our non-North American clients are focused in offshore basins. What we have viewed in the U.S. is some onshore companies switching from conventional gas to conventional oil, purely as a result of relatively low gas prices, while, at the same time, we have historically high oil prices. We are observing a switch in development activity from gas plays to plays that have a high liquids component.
Investor: Within upstream, in which types of E&P business models are public markets most eager to invest?
Slavinskiy: The public market is very hot in terms of interest in E&P activity and very hot for interesting assets. Take (newly public) Kosmos, for example. It's a midsize company with European and African assets. Investors like the mix of assets, which is production—up to $900 million of EBITDA per annum coming from production already—plus massive upside coming from exploration in places like offshore Morocco, for example. Investors like the upside, and they certainly like the cash flow also.
But, the European public market is interested in more exploration-weighted portfolios, too. (Russia-based) Exillon Energy Plc, for example, is a large exploration company that is also public. It has shown it is able to find oil and at an adequate cost. Companies like Exillon also get a lot of following.
Investor: Is Europe's new banking regulation, Basel 3, making European reserve-based lenders less competitive with private equity, public equity and public debt?
Slavinskiy: I don't see any particular constraint. Capital is actually quite—I wouldn't say abundant—adequate toward industry right now. In energy, at Citi, we don't see any extraordinary pressure in lending on quality assets.
Investor: Trevor, are your portfolio companies able to access sufficient debt leverage from European lenders?
Burgess: There is no doubt we're seeing more investment opportunities because companies can't raise money from banks as easily as they used to. They are coming to private equity. One of the things we can do at Lime Rock is invest in our portfolio companies through the business cycles, mainly with equity, so they are not burdened with high debt levels. We're expecting to see a number of good opportunities during the remainder of this year and into next year.
Investor: What are your clients at SocGen experiencing in the international energy M&A markets?
Boury: Those that have existing production and want to reinvest their cash flows into acquisition of assets or companies are having difficulty with finding the right targets. And, when they find one, they have a hard time competing with Asian national oil companies (NOCs) that are very hungry for assets or other companies in the upstream as well.
In many cases, the NOCs are acquiring reserves from a long-term, strategic perspective and, therefore, are much less price sensitive than, perhaps, a privately held company would be. This is exacerbated somewhat, of course, by an environment of particularly high oil prices.
Kevin Price, London-based managing director and head of reserve-based lending for Societe Generale, notes the bank’s lending in North America is focused onshore.
Investor: Are non-North American E&Ps regaining interest in operating in the Gulf of Mexico in the new regulatory regime?
Slavinskiy: It's inevitable a next wave of investments will occur. Clearly people are put back by the ban on drilling, but, once the regulatory regime is clear and the responsibility for liability is in the open, the investment will flow. The Gulf of Mexico is very low on the level of geopolitical risk. Given what's happening in the Middle East this year, the Gulf should get more attention.
Burgess: We have one E&P company in our portfolio that is operating in the Gulf of Mexico. Our current fund, Fund V, is 70% invested in oilfield services and technology. The Ma-condo incident has increased operators' focus on safety and well integrity in deep water and subsea, and I think this has created a number of service and technology opportunities.
Investor: More than half of your oilfield-services investments are outside the U.S. and Canada.
Burgess: Yes, in Europe and elsewhere. We recently invested in oilfield services in Iraq and we've opened offices in Dubai, where we are growing a manufacturing and products company in drilling tools.
Investor: And midstream. Are there investment opportunities there for you, Trevor?
Burgess: Investing in midstream certainly is within our mission. However, there are more generalist investors in that area. The real expertise Lime Rock brings to its portfolio companies is its specialized knowledge in the upstream. That's where we add the most value.
Investor: Do you foresee continued strong growth in the midstream sector, though?
Burgess: It's highly probable. It's clear, even in Eastern Europe, that there is a need for more distribution infrastructure. One of our midstream portfolio companies is a Polish gas-distribution company. It's not one of our biggest investments, but it's recognition by Lime Rock that the midstream is an area of growth, particularly in Eastern Europe.
Investor: What are your clients' greatest concerns about their business going forward?
Slavinskiy: Among the international oil companies, it is production growth and access to resources, including resources constrained by NOCs that control these and try to make use of them for themselves. This is a massive change since the 1960s or 1970s. On the other end of the spectrum, the small, privately held players have made more progress, such as Kosmos offshore West Africa and the U.S. unconventional-resource developers. They have shown they can make a difference with smaller investments.
Global demand growth is also a great concern—what will happen in the U.S. and Europe in terms of economic recovery. And, Chinese demand is a swing factor. Oil and gas producers are also concerned with their ability to market gas—to deliver it from Australia and Russia, for example, to where it is consumed.
Also, there is interest in the potential for competition from gas resources in transportation infrastructure. These things are all on the minds of E&Ps, from global majors to small companies.
Investor: And investors' concerns?
Slavinskiy: Investors are mindful of the economic component of any E&P technology. Clearly a lot of unconventional oil production would be completely obsolete if oil fell to $50 or $40. Every investor with exposure to unconventionals should be mindful of that.
Marie-Aimée Boury, Societe Generale’s managing director and deputy head of reserve-based finance for Europe, the Middle East and Africa, says it is currently difficult for clients to find the right acquisition targets.
Investor: What is your greatest upstream business concern these days?
Burgess: People are always worried about the business cycles in oil and gas. Overall, we're feeling very positive about the long-term future for oil and gas investment—as long as the overall economy is firm, of course.
I'm very optimistic. I don't believe the world economy is going to collapse. We go through moments of panic, such as when Greece defaults or something like that, but the world is going to be dependent on oil and gas for a long time yet, and wind and nuclear are not going to take a large share of the market in the foreseeable future. I don't worry about it.
Investor: What role will natural gas play in decades to come?
Slavinskiy: Frankly, (affordable) oil will run out one day. From a broad perspective, global oil companies will be thinking about alternative energy, about how to transform their business models in 30 or 40 years. They are thinking about it already.
Investor: What is a characteristic among your most successful clients?
Boury: Some have been very successful with buying mature assets, pushing down operating costs and extracting the very last drop of oil from these assets. Some have been very good at discovering major fields and getting them into production very quickly. Some are very good at doing both.
There is not one business model that works, but what is key is management's ability to adapt to the cycles.
For details on how to plug into capital from these and other firms, see "Finding Capital: A Directory" in the June 2011 special report "Here's the Money: Capital Formation 2011" at OilandGasInvestor.com.