Q&A: US upstream industry outlook positive: KPMG
Houston, 15 September (Argus) — The US oil and gas industry outlook remains positive even as oil prices hover largely below $50/bl, with a healthy appetite for mergers and acquisitions (M&A). Regina Mayor, US energy sector leader at KPMG, spoke with Argus Media on investment plans, M&A and overseas investor interest.
What is the outlook for 2H 2017 and next year?
Producers are relatively comfortable in the $45-$50/bl range that they find themselves in.
Certain producers are benefiting from the big bets that they have made in the Permian and they have really, really strong acreage. A lot of independents have radically reduced their footprints and their reliance on international production in parts of the world that are perhaps less secure. I think they have taken really strong steps to solidify their positions, ratcheted the capital to where we are still seeing reserve replacement ratios that are roughly similar to what they have had in the past. They are technologically more proficient in finding and extracting hydrocarbons with less capital.
I don't anticipate further capex reductions. They have put in place pretty conservative capex budgets already, and I don't think anybody realistically is planning for a return to $60/bl by the end of 2017.
What about oilfield services costs? There was talk earlier this year of a 10-15pc increase.
Oilfield services companies don't feel like they have pricing power yet, they are still in the doldrums about margins and returns.
Producers are posturing a little bit to help keep prices down and cautioning against price escalations. But there is still a lot of competition and volume of work is still patchy, so it is causing price points to stay relatively low. And services companies are more focused on asset utilization in the short term versus price increases.
I am getting a sense that they are not getting that price escalation. I think their focus is more on asset utilization. Now, you don't see oilfield services companies signing contracts with negative margins, which they might have been during the more severe part of the downturn. They are making sure that they are signing contracts that are positive for their company and shareholders.
I think there is no slowing down in terms of efficiencies and technologies that they continue to bring to the field. It is like battery efficiency in your smartphone, it just keeps getting better and better. I think the same applies for oilfield technology.
What is your view on the M&A outlook?
We are going to continue to see asset level sales as opposed to corporate level takeovers. You have the big announcement of BHP Billiton assets coming on the block.
The bid-ask spread is coming closer together. So I don't see money sitting on the sidelines. I do see them moving to other basins — the Scoop and Stack, the Powder River as opposed to being so focused on Permian. But I don't necessarily view that as a slowdown in the overall energy deal appetite. I see that people hedging their bets and moving money to different parts of the geography as opposed to overloading in one particular play.
The Permian is still affordable. Not all acres are created equal, so depending on how you can align your acreage, there are still really good deals to be made. And frankly, we are still seeing mom and pop producers going in to the Permian and making money. I don't think the Permian is too expensive, and smart prospectors are still getting really good deals in that area.
What about oil producers gas assets?
There is a sense that gas as a commodity is a throw away product if you are really prospecting for oil and that's what a lot of the big LNG players are hoping it gets to. It might even be one of those deals where somebody pays you to take their gas away, or lets you buy it a fraction of Henry Hub, if you build the transportation facilities to get it from where it is extracted to the Gulf Coast, for example.
You are going to see midstream companies and LNG companies trying to go after stranded gas assets from existing producers that are more interested in oil. And that is going to create a fundamentally new market for gas that is not tied to the current hub pricing.
I am really fascinated by where that takes us relative to competitiveness for manufacturing, competitiveness for LNG exports. That is what the basis is for some of these companies declaring that they can take US Gulf coast shale developed gas and put it into Tokyo bay — it is predicated at they not having to buy it at Henry Hub prices.
Who would you pick as the winner between pure-play shale independents and diversified producers?
It is too early to call who is going to be the winner there. The US has so much potential, the regulatory regime is stable, relatively not subject to major changes, safe, so there are a lot of things that are very attractive about having an onshore US only position.
But I am still an old school dinosaur that says I don't want to put all my eggs in one basket in this industry. So I guess I am sort of partial to those that have still kept a footprint that includes Gulf of Mexico, some international that is safe. If I am a betting person, I will place my odds on diversification as your long-term best bet, but it remains to be seen because the onshore shale domestic footprint continues to be pretty attractive.
What has overseas investor interest been like?
There is still a lot of bullishness around the underlying commodity itself — and I think there is still a lot of interest from all kinds of investors to come in in various forms.
I think you are seeing overseas investors coming in, some more silently like hedge funds. I haven't seen too many of them take a stake directly in the Permian and places like that probably only because you really have to know what you are doing to be successful in unconventional. They are probably not ready to jump in because it is a business that is new and not as many people know how to operate successfully. I would see them coming in as joint venture partners. I don't see them staying away, that's for sure.