Merger and finance activity in the oil and gas industry has been tricky to predict, given its economic fluctuations in recent years. A slate of speakers last week, however, delivered insights on the fickle world of energy M&A and financing from a variety of angles.
Energy sector players gathered Tuesday at the Four Seasons in downtown Denver for the 6th Annual Energy M&A and Financing Forum. Davis Graham & Stubbs presented the event, which featured DGS attorneys and industry executives. From market outlooks in oil and gas to reviews of rules and regulations, the overall tone among speakers was one of positivity tinged with conservatism.
Keynote speaker Andrew Byrne, director of equity research at IHS Markit, opined on the emerging patterns of oil and natural gas pricing as it has affected — and might continue to affect — decision-making among upstream oil and gas companies. While he noted “a strong outlook on oil demand,” his was a message of “cautious optimism” amid changing norms of recent years.
The energy industry resigned itself to a new normal of consistently lower oil prices per barrel, or the “50 Forever” concept, Byrne said. But those prices have begun rallying upward of $60 in recent months in what many analysts consider a short-term aberration of lower inventory, he added. That spike can create a challenge for M&A deals, he said, because the buyer is going to want to value the oil assets based on a $50 to $55 price per barrel, but the seller will want to use the higher price point.
On the natural gas side of the market, he cited industry predictions that natural gas will remain below $3/MMBtu into the early 2020s.
“Gas prices never really recovered after the financial crisis of 2008,” Byrne said. “We were basically around $4 [per MMBtu] at that point, now we’re looking at gas volumes continuing to grow … and gas prices continuing to go down.”
Economic uncertainties in the energy sector influenced companies to adjust their approaches to M&A agreements, and DGS tracked those adjustments in a survey presented at the event by partner Lamont Larsen. DGS conducted a survey of public U.S. oil and gas transactions since 2013, analyzing the terms companies were putting in the provisions of their M&A agreements and with what frequency. The findings illustrated how transaction parties pushed for more safeguards in the wake of the oil price drop of 2014.
From 2013–2015, 82 percent of the deals had the buyer pay a performance deposit, but in 2016 and 2017, almost all of the deals did at 96 percent. A quarter of the deals in 2017 had a performance deposit of at least 10 percent, compared to about 11 percent of deals from 2013 to 2014.
“In the last quarter of 2014, when prices plummeted, there were a lot of deals that failed. Since then, there’s been a marked increase in sellers needing more closing certainty,” Larsen said.
The firm also looked at termination remedies in the 2013–2017 deals, specifically what the terms were if the buyer breached the agreement. Sixty percent of deals let the seller keep the deposit as liquidated damages. In almost all of the remaining 40 percent of deals, the seller could seek specific performance, and in 18 percent of the remainder, the seller could sue for damages.
The forum also touched on issues relating to the Securities and Exchange Commission. DGS partner Laura Gill, joined by Ernst & Young’s Paul Elggren and Ryder Scott’s Scott Wilson, discussed how to best handle oil and gas reserve disclosures to the SEC.
Under the SEC’s “five-year-rule,” a company can only categorize an oil and gas reserve as “proved” and “undeveloped” if it can show the SEC that it has a plan to develop the reserve within five years. The SEC might send comment letters to the company for more explanation if it is skeptical of the plan. If the SEC remains unconvinced, it may call to have the PUD downgraded to a “probable” or “possible” reserve.
To avoid receiving comment letters from the SEC, Wilson said, “you should have a nice, clean profile [showing how] you drill the well, complete it and bring it online.”
The SEC also wants to know how efficiently oil and gas companies are developing their wells. The commission may send comment letters if, in the company’s Form 10-K disclosures, it sees a low conversion rate for PUDs. Elggren stressed that, in case the SEC issues those letters, companies should maintain reliable data to back up their reserve estimates.
Closing the forum was a panel discussion among CEOs of Colorado-based oil and gas companies, and what their expectations were for the industry’s market.
Andy Rapp, co-founder of oil and gas investment banking firm Petrie Partners, noted there had been “a real lull in corporate M&A activity” among energy companies in recent years.
“The investment in the energy space has been bearish over the last several months,” Rapp said. “It’s been challenging for public companies to do a lot of acquisitions.”
But Rapp, as well as Whiting Petroleum President Brad Holly and Caerus Oil & Gas CEO David Keyte, struck a somewhat hopeful tone for the future. Holly said his company aims to use improved technology that will help make well production more efficient and achieve a better rate of return at its different assets.
In a deal completed in July, Caerus bought Encana’s Piceance natural gas assets in northwestern Colorado. Keyte called it “a fantastic strategic asset” that had plenty of infrastructure in place at the time Caerus took it over. Keyte said the recent acquisition didn’t mean his company was necessarily “bullish” on gas, but the “low entry point” on gas acquisition was an appealing factor. “We bought into the fact that we could make money at these pretty low prices.”
—Doug Chartier