I have been asked to serve on a panel discussion at Power Generation Week December 11 - 15, 2016 in Orlando. This panel discussion will discuss the electricity business model of the future and the state of the industry in 2030. Panelists will discuss fuels, transmission & distribution, generation, regulation, workforce dynamics, and customer experience. The changes predicted to take place in the next 15 years will be more dramatic than the changes experienced over the last 50 years. Changes in every sector of the power generation market will significantly alter the business model of tomorrow. Come join the debate. I have been asked to address the future of fuel markets.  There will be new ideas presented that upstream companies should find useful in charting strategies for the next 15years. Register Here   PGI 6A - 2030: A View of the Electricity Business Model of Tomorrow - Panel Discussion Room: S330C Session...

The Wall Street Journal reported today that oil prices continue to rally based on the news that OPEC has reached some kind of deal to reduce supply. We have seen this movie before and the report should be the last reason for a bullish move in oil. Two reasons mentioned in the article: OPEC has over the 40 years I have observed has rarely and never for long sustained production cutbacks. Now that Russia is reported to be part of the deal the cohesion is even more frayed. Add to that the simmering tension between Saudi Arabia and Iran and the boiling hot war in Syria, and little should be expected for this deal to hold. Any reduction in OPEC+Russia supply will be gladly filled by the third largest producer, USA’s shale producers. Marginal costs have declined and a sizeable inventory of yet to be completed wells is waiting. Also, expect...

This article from the Wall Street Journal provides the background. But the real question is “Why are investors continuing to fund the walking wounded? First, keep in mind that assets do not declare bankruptcy. Second, companies, do. Third, despite legal proceedings, assets will continue to produce. Over supply will continue as long as revenue returned to those assets exceeds cash operating expense. Thus, one could argue bankruptcy is irrelevant to the oversupply of oil and gas. About all that has happened in oil and gas bankruptcy is the equity holders get wiped out. New investors arrive with fresh financing to buy the claims of the secured creditors and the dance goes on. A feature of bankruptcy is Debtor-in-Possession (DIP). A DIP can obtain interim financing to keep operating while the court proceedings are resolved. DIP financing has priority over all other claims. If it is withheld, the dance stops and everyone...

A recent Wall Street Journal article opens a window into a new and unsettling world. More chaos in the oil markets and more instability in the Middle East. Saudi Arabia sought to raise crude oil prices by driving US Shale producers and other low cost producers out of business. That is, by setting the oil market on fire with a flood of oil, they would set a price so low, US producers would have to shut in and stop drilling. They reasoned it would do two things. Reduce supply and drive up the price; and, Allow them to recapture market share. But the strategy blew up in their faces for several reasons. They underestimated the ability of US producers to drive costs lower. Never bet against innovation. They underestimate their own cost of production. The Royal family has for decades kept the population content and docile with huge subsidies and lucrative...

It is pretty clear there is a wide divergence in performance among the largest North American oil and gas production companies. At mid-year 2015 we did a study on the largest players, those that at time had a market capitalization (total value of equity) greater than $1 Billion. That screen resulted in approximately 90 companies engaged in exploration and production in the US and Canada. The study illustrated in pretty stark terms that during the 10 year period 2004-14 only a few companies met the number one performance criterion, Return on Invested Capital (ROIC). Further, this was the boom period culminating in oil prices over $100 per barrel. If a company were to succeed, this would be it, yet only a few did. One year later, it seems sensible to take another look to see how the Stars, Contenders, Vulnerable, Struggling and Troubled companies had performed during the downturn. To say...

A recent article in the Wall Street Journal reports that energy hedge funds are under pressure from institutional investors. These mainly pension funds along with college endowments face tens of billions in losses from their investment in the Exploration & Production (E&P) sector following the fall in prices. After prices plummeted at the end of 2014, private equity rushed in armed with over $60 Billion of new investor money. Another $30 Billion has gone in so far in 2016. Private equity has been successful attracting new investment since the downturn on the basis of a “contrarian” play. That is, when prices return to normal, the new money will reap a windfall. That has, so far, not been the case. Yet, is there hope for the institutions and their beneficiaries? Since the price of oil went into free fall at the end of 2014, nearly $60 Billion of market value has evaporated...

At the turn of the last century Argentina had one of the top 10 economies in the world, number 5 to be exact. But a toxic combination of bad economic policies, made worse by incompetence and a particularly virulent form of populism led to economic disaster. As late as 2014 Argentina was involved in a lawsuit in US Federal court over its eighth default on bonds and the President, Cristina Kirchner could not travel in government planes, risking seizure of the aircraft. Bond holders even tried to seize Argentine naval vessels in an African port, and nearly succeeded. Fast forward to the present A new president elected under the banner of economic reform and things are suddenly different. An agreement with American Energy Partners and YPF, the state oil company, to develop Argentina’s shale resource was recently signed. Soon thereafter, the new President Mauricio Macri, lifted prices on retail power prices,...

How Do You Catch a Falling knife? The simple answer is you don’t try. That doesn’t mean that many very smart, knowledgeable people with access to the best information about the danger of knives and Newton’s law of gravity don’t try, with the expected consequences. Yet, there could be some very good reasons to catch the knife: Prevent some serious damage when it hits, Gain possession of a very valuable asset, Capture a competitive advantage over the “knifeless”. Oil and Gas Hedge Funds Forge Ahead According to Market Realist over $1 Trillion of upstream market capitalization has been erased due to falling prices. About $14 Trillion flowed into oil and gas exchange traded funds in the past 18 months. That does not include direct investment, primarily by the smartest of the smart, the hedge funds. The financial press is replete with disaster stories, most notably KKR’s worsening loss in Samson Resources...

Introduction This case study is part of a continuing series prepared by Pangea Global in its ongoing research project on the business of oil and gas. The project examines the three key business dimensions of performance, People, Strategy and Business Processes for the North American exploration and production industry segment. The case study series illustrates specific sources of high performance within those three dimensions unique to each company. These case studies are used to help companies seeking to improve their performance by illustrating how high performing companies have found their way to success. The case studies are developed from public documents with requested clarification from the companies. As such, proprietary information is never collected and respect for full disclosure is strictly adhered to. Summary Peyto has achieved remarkable success in the challenging tight gas reservoirs in the deep Western Canadian Sedimentary Basin (WCSB). With only 50 people, the company has earned...

If I were advising Exxon-Mobil’s next CEO what would I recommend? This is a purely hypothetical question as I am not waiting for the phone to ring. Rather, the intent is to illustrate one view of how a radically new industry structure could unfold. The bottom line is that Exxon should become a technology company. The Wall Street Journal reported this morning that Darren Woods was named President effective January 1. Similar moves preceded the elevation of past Exxon CEO’s including Lee Raymond and incumbent Rex Tillerson, suggesting Mr. Woods will become CEO upon Mr. Tillerson’s retirement, no later than 2017. The next CEO will have to steer the company in a time of chronically low oil prices. In my view, this presents both the obvious challenge and perhaps new opportunities. Exxon among all the International Oil Companies (IOC) has options to play the game in new and perhaps more...

A significant developments occurred this week affecting the US gas market. New LNG Futures Contract As reported in the Wall Street Journal, Singapore Exchange Ltd has created a market for LNG futures and swaps. Trading could begin as soon as January. The contract will be called the Singapore SLiNG.  (The name alone is worth the price of admission) What does this mean? Price Transparency The first impact will be to provide greater transparency to the price of LNG. Most cargos are sold under long term contracts, often not visible and with opaque terms for origin, destination, transportation charges and pricing and adjustment provisions. This makes estimating the true market value a guessing game at best. Growing LNG Spot Market Although the number of long term contracts has declined and spot trades have climbed to 29% of total volumes, pricing has mainly been privately negotiated between counter parties. Re-exports of cargos under...

In a Wall Street Journal interview this week, IEA chief Fatih Birol predicted oil prices rising to $80/BBL in 2017. The rationale?  "Current prices are not sustainable", whatever that means. This seems to be more wishful thinking than hard fact or intelligent analysis. I am sure the IEA, like most everyone else, is hard pressed to make sense of this historic situation. In another WSJ article, a survey of investment banks delivers “a sobering message”, oil prices won’t break $60/BBL next year. Really? Prices today are below $40. Inventories are at record levels and some express concern that storage capacity may soon be so full that floating storage in tankers may be brought on line. Yet there are some that expect (or hope) that this week’s OPEC meeting will bring some rationality to the market and there will be a short term bump in prices. The reasoning is that the Saudi’s...

In a wide ranging interview in Barron's Larry Jeddeloh the Institutional Strategist makes a good case for higher oil prices. Common knowledge has long held oil to be a political commodity. Indeed the Saudis have used their spare production capacity and pricing power to pressure more vulnerable producing countires, mostly Iran. A new player has emerged and flexing his much photographed physique, Vladimir Putin. Now that he sees an opening in the Middle East, Vlad is moving to join forces with the world's largest exporter to get what they both want and need, higher prices. Add to this mix, the Iranians threatening Saudi Arabia from Yemen to the south and a new potentially potent brew bubbles up. Iran is soon to be exporting more oil and would dearly love to get a higher price for it. Could a new alliance be in the making? Mr. Jeddeloh certainly thinks so, and...

Energy Transfer (ETE) is buying Williams Companies (WMB) for $32.6 Billion, $15.4 Billion less than was offered in June. Article That is an astonishing 32% decrease in value in just 3 months. What is more amazing is that William is a midstream company with little direct price risk. It owns one of the industry’ most valuable assets: the Transco system, and has other pipes serving growing natural gas markets on both coasts. One would think that Energy Transfer would be rewarded by Mr. Market for such a shrewd deal. Not so. On the day the deal was announced ETE dropped 13%, a further $13.7 Billion erosion in value. Read More This $29.1 Billion loss in value is for a combined company that will have on the order $47 Billion in market value. What gives? Has the oil price contagion spread that far, that fast and that deep that even Steady...

N_Amercian_EP_Financial_Performance.pdf Defending against a takeover a few months ago may have seemed a worthy cause and the biggest challenge for senior management of upstream companies. Today, a takeover may be the best outcome for many North American E&P companies. The reason is that despite the collapse in oil and gas prices many upstream companies could and perhaps should be acquired or their assets sold. These companies have a negative enterprise value and what asset value they have should be placed into the stewardship of other management teams. That means; asset value exceeds the value of the company. We examined the publically traded E&P companies operating in North America (US and Canada), excluding the integrated majors. We included only those with $1 Billion or more in market capitalization to ensure scale and resources were not constraints on success. We looked at the 10 year period from 2004-2014, a time frame that includes...

I recently came across this excellent article  by Chip Moldenhauer of Law IQ. Mr. Moldenhauer dispells some common misperceptions regarding the development of natural gas pipelines. The regulatory process administered by FERC is well developed and grounded in evidence. It balances the nation's need for more clean energy and the legitimate concerns of environmental advocates. The route to economic growth and reduced carbon emissions is facilitated by natural gas. A critical pathway is the natural gas pipeline network. Many thanks to Dale Honn of Natural Energy Field Sevices. For making me aware of the article....

Down Load the Whitepaper Your client has achieved a major milestone thanks to your help: the plan of reorganization has been approved by the unsecured creditors and confirmed by the judge. As bankruptcy counsel you should feel good. Your job is basically done until the time comes, if ever, for the case to be dismissed. But do you have a sense of unease? Can these guys really pull it off? Will they make the same mistakes that landed them in Bankruptcy court this time? Will they make other, perhaps worse mistakes in the future? These are valid concerns and are intended to be handled in the plan negotiation. Indeed, the parties asked to take a haircut certainly will be asking these questions and any new capital source will closely scrutinize the plan. But there is more to achieving a good outcome than what most Disclosure Statements usually address. While this...

Many are the musings and ramblings on the outlook for the oil and gas industry. The few hard realities are that the demand for oil is in a long term (“secular” as we economists like to say) decline. There are permanent structural forces at work here: Slow economic growth, slowing population growth and increasing energy efficiency. Add to that the unprecedented increase in supply and the makings of a perfect storm are evident. The news is not good for oil market bulls. Because these trends are secular, the price of oil is likely to be low and volatile for many years, if not decades. Why? First, The US economy, burdened by regulation and declining work force participation, has headwinds along with fewer workers running the economic engine. Retirement of baby boomers is certainly a big and permanent demographic trend. However, more insidious is the low labor force participation rate. At...

The standard definition of Enterprise Value is the Market Value of a company’s Debt and Equity less cash. It is typically used to determine the offering price for a takeover. This is illustrated in the diagram:   Source: Street of Walls; Investment Banking Technical Training. However, in exploration and production, Enterprise Value has an additional meaning: The market value of the entire Business minus the market value of the company’s individual Assets. That is, the intrinsic value of the company as a capital steward. Frequently a company becomes a takeover target when an acquirer perceives they can manage the target’s assets better than the incumbent team, creating added shareholder value. The ability to sustain a higher intrinsic value relative to its assets depends on the company’s stewardship of capital. Is the current leadership team better able to exploit and grow the assets than a suitor? If the business generates returns that...

Pope Francis’ release of his Encyclical Letter “On Care for our Common Home” raises many issues of interest and concern for the oil and gas industry. Looking deeper into the issue of climate change from the perspective of geologic time provides useful insight and suggests public policy positions and specific strategies for oil and gas executives. Climate change is a dynamic process and is by no means isolated to the age of industrialization. In fact, climate cycles have occurred across the Phanerozoic eon, the last 541 million years during which life on earth has been abundant1. During that period there have been at least four glacial periods including the more commonly known Pleistocene or Quaternary Ice Age lasting from about 2.58 million years ago (MYA) to the present. Earth is emerging from this glacial period with the retreat of polar ice evidenced over the last 15,000 years. Even during that brief...