THE ENERGY ECONOMY IN 2018 - JANUARY 24, 2018 - Holland & Hart LLP
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JANUARY 24, 2018 THE ENERGY ECONOMY IN 2018
Natural Gas Update
Presentation to:
The Energy Economy 2018
By:
John Harpole
January 24, 2018
It is not a scarce resource anymore
3
Fracturing Application Exploded
Source: Chris Wright, Liberty Resources Tuesday Lunch Club Presentation, 3/5/13
5
FIGURE 3
UNITED STATES NATURAL GAS PRODUCTION
Billion Cubic Actual Forecast
Feet Per Day Price Controls
60
Section 29 Tax Credits
55
50
45
Lower 48
Conventional
(Non-Associated)
40
Shale
35
30
25
Tight
20
Gulf of
15 Mexico
10
Associated
Coalbed
5
0
1945 1955 1965 1975 1985 1995 2005 2015 2025
6
Source: The Outlook for Oil and Gas, Henry Groppe, Groppe, Long & Littell, May 2017
Despite a price drop
Historical Henry Hub Index Prices (1996-Current)
$10.00
$9.00
$8.00
$7.00
$6.00
Per MMBtu
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
7
Source: Midstream to Markets: Oil Markets: Out of the Woods?, RBN Energy, The Energy Summit, August 23, 2017
8
1990-2013: Wellhead total data from DI Desktop
2014-2025: Kinder Morgan forecast
9
Source: Kinder Morgan, 2015 Business Meeting: West Region Gas Pipelines, November 2, 2015Dry Gas Production 5-Year Outlook
Source: The New Normal(ization): Market Intelligence: FundamentalEdge Outlook, Bernadette Johnson, August 2017
10Total Demand: 5-Year Outlook
US Demand by Sector
90
80
Demand for natural gas is expected to grow 70
significantly in the US over the next 5 years.
LNG exports leads demand growth, while
60
power demand and Mexican exports will also
contribute sizeable increases.
50
Bcf/d
Total demand is expected to increase by
almost 9 Bcf/d in 2021 over 2016. 40
30
20
10
0
2015 2016 2017 2018 2019 2020 2021
Rescom Ind Other (Fuel) Power LNG Exports MX Exports
Source: EIA, SNL, NOAA Weather
11
24 Efficiencies Strike Back
The New Normal(ization) © 2017 Drillinginfo,
© 2017 Inc.Inc.
Drillinginfo, AllAll
rights reserved.
rights reserved.All
Allbrand
brand names
names and
and trademarks arethe
trademarks are theproperties
properties of their
of their respective
respective companies.
companies.FIGURE 7
US NATURAL GAS EXPORTS
Billion Cubic
Actual Forecast
Feet Per Day
28
Total Export • LNG = 14.0 Bcfd
Capacity • Pipeline = 12.1 Bcfd
24
20
18.1
16
12
LNG Exports
8
5.3
4 Pipeline
Exports to
Mexico
0
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20The Crystal Ball Price Forecast
YEAR WTI HH
($/Bbl) ($/MMBtu)
2018 $55 $3.15
2019 $60 $3.00
2020+ $60 $3.00
13Conclusions: Natural Gas (cont’d)
• Pipeline flows across the country have already changed
dramatically as a result of the Marcellus/Utica growth.
– A de-bottlenecking in the Northeast should finally occur in
4Q2017/1Q2018. Expect Northeast basis to tighten starting this
winter
– Bottlenecks in the Permian and Anadarko are emerging. In the
Permian, gas needs to move East in order to reach growing LNG
demand while in the Anadarko, the constraints are intra-basin
and to interstate pipelines.
• Over the next 5 years, significant natural gas production
growth is expected in the Permian, Anadarko,
Marcellus/Utica and Haynesville. Significant demand
growth is also expected, led by LNG exports.
14Contact Information
John Harpole
President
Mercator Energy
26 W. Dry Creek Circle, Suite 410
Littleton, CO 80120
harp@mercatorenergy.com
(303) 825-1100 (work)
(303) 478-3233 (cell)
15Holland & Hart Insights: The Energy
Economy in 2018
Jeff Knupp
Managing Director ‒ Tudor, Pickering, Holt & Co.
JKnupp@tphco.com
January 24, 2018Agenda
1. Setting the Stage
2. Transaction Activity
3. Industry Activity & Investment
4. Equity Performance & Investor Sentiment
17Setting the Stage
$120
$110
$100
Current
$63.38
$90
$80 2/11/2016
$26.19
$70
$60
$50
$40
$30
$20
1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018
___________________________________________________
18
Source: FactSet as of 1/19/2018.Commodity Backdrop
Sentiment and Confidence Drive Values and Activity
1/1/2016 12/1/2016 Current
$65
$62.02
$60
$58.24
$55.60 $55.32
NY MEX W TI ($/bbl)
$54.61
$55 $54.66
$53.57 $53.64 $54.19
$53.93 $54.08
$51.96
$50
$49.36
$46.06
$45
$40.97
$40
2016 2017 2018 2019 2020 2021
E&Ps in a $60 world (E&P $469; WTI $60) – WTI is flirting with $60/bbl, closing at $59.60 yesterday, while our current long-term price deck sits at $51. As
inventories continue to draw, we expect the back end of the curve may continue to strengthen, so we took a look at our coverage universe at $60/$3
LT. The space becomes a NAV upside story again, moving to 47% upside on average vs. our current deck at 9%. On valuation multiples, our coverage
compresses to 4.1x in 2020 at $60 vs. 5.2x at our deck. Of our liquids-focused comp groups, the diversified SMID-cap names have the most room to run with
56% upside, on average, and 3.3x EV / EBITDA in 2020.
- TPH Research Morning Note (12/27/2017)
19
_______________________________
Source: TPH Research and FactSet as of 1/19/2018.The US Upstream M&A Market
A Fast Start to 2017 Slowed with Commodity Uncertainty
2017 M&A Has Been Healthy YTD(1) A Return to “Normal” Big Deal Year
# of Transactions > $500mm :
Avg. 2011-2013 2014 2015 2016 2017
100 $500mm - $1 Bn > $1 Bn
$92.7
39
90
37
80 34
32
70
29
20
$63.1
$61.1 26
60
$58.9 21
24
20 15
50 13
10
9 18
40
5
30
$26.4
20 19
16 16 17 16
14 15
13
10
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 2011 2012 2013 2014 2015 2016 2017
___________________________________________________
Source: IHS and Dealogic.
20
(1) US resource transactions greater than $50 million.Where are the Deals Getting Done?
Rockies
Appalachia
$8.7 Bn
$11.2 Bn
$4.2 Bn $6.5 Bn
Midcontinent
2016 2017 $6.7 Bn
2016 2017
$6.0 Bn
Permian
$27.4 Bn 2016 2017
$21.6 Bn
Eagle Ford
$6.1 Bn
2016 2017 $2.7 Bn
2016 2017
___________________________________________________
Source: EIA play and basin definitions as of 2011, IHS and Dealogic, as of 1/19/18. 21
(1) Non-US resource transactions greater than $50 million within LTM.Who are the Buyers?
Deal Volume by Buyers ($Bn) Deal Volume Detail
Public Buyers Less Active in 2H 2017
By Basin By Buyer
Private Public
Other
12%
Bakken Permian
6% 27%
Private
2017
Midcontinent 37%
12%
Public
Appalachia 63%
Eagle Ford 13%
12%
$15
Rockies
$17 18%
$12
$16
$9
Other
22%
$6 $4
Permian Private
2016
Bakken 43% 36%
3%
Midcontinent
$1 $8 11% Public
$6 $6 64%
$6 $6 Eagle Ford
$4 $4 $5 4%
Rockies
7% Appalachia
10%
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017
% Private
84% 42% 20% 35% 26% 35% 45% 61%
___________________________________________________
22
Source: Dealogic, IHS as of 1/19/18.Funding: Where does the Money Come From?
Record Upstream Funding in 2016 Screamed to a Halt in 2017
Annual Upstream Equity Issuances Since 2012 ($Bn) Annual Upstream Debt Issuances Since 2012 ($Bn)
$53
$33 $32
$28 $26 $28
$23
$14 $16 $15
$10
$7
$0 $1
2012 2013 2014 2015 2016 2017 2018 YTD 2012 2013 2014 2015 2016 2017 2018
YTD
Quarterly Equity Issuances Since 2016 ($Bn)
Energy Upstream
$11
$9 $4
$7 $7
$14 $1
$13 $11 $12 $11 $1
$7 $1
$5 $0
$4 $2
Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18
___________________________________________________
23
Source: Dealogic, IHS as of 1/19/18.PE “Dry Powder” Still Near Record Levels… Directed to Energy
North American Natural Resources-Focused Private Equity Dry Power
~$120bn of investable capital
$80 focused on natural resources at
present assuming 1.0x debt/equity
$70 $67
$63
$61
$60 $58
$52
Dry Powder ($Bn)
$50
$43
$40
$40 $38
$35
$30 $31
$30 $27
$20
$14
$9
$10 $7
$0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
___________________________________________________
Source: Preqin.
24
Note: “Dry Powder” defined as capital committed by / raised from LPs, but not yet invested.Energy Investor Sentiment: Dislocation from the Broad Market
Apathy for 3 Quarters of 2017 Starting to Turn Around
S&P 1500 Energy Relative to S&P 500
1.30 $70
1.20 $60
1.10 9% $50
$46.07
Indexed Performance
1.00 $40
WTI Crude
0.90 $30
(20%)
0.80 $20
0.70 $10
0.60 $0
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18
S&P 500 S&P 1500 Energy WTI Crude
___________________________________________________
25
Source: Factset as of 1/19/2018.Energy Investor Sentiment: Dislocation from the Broad Market
Apathy for 3 Quarters of 2017 Starting to Turn Around
S&P 1500 Energy Relative to S&P 500
1.30 $70
25%
1.20 $60
$62.38
1.10 $50
1%
Indexed Performance
1.00 $40
WTI Crude
0.90 $30
0.80 $20
0.70 $10
0.60 $0
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18
S&P 500 S&P 1500 Energy WTI Crude
___________________________________________________
26
Source: Factset as of 1/19/2018.Investors Starting to Make Money Again
Q1 - Q3 Q4 FY 2017
19%
17%
15%
13% 12%
9%
8%
6%
1%
(4%)
(6%)
(9%)
(12%)
(14%)
(16%)
S&P 500 S&P E&P WTI Large-Cap Permian
Independent
___________________________________
Source: FactSet as of 1/19/18.
Note: Permian equities include: CPE, CDEV, CXO, FANG, EGN, HK, JAG, LPI, MTDR, PE, PXD, REN and RSPP; Large-Cap Independent equities include: APC, APA,
27
COP, DVN, ECA, EOG, HES, MRO, MUR and NBL.Conclusions
Reflecting on 2017 Questions as We Look Forward to 2018
2016 was “the year of the Delaware” How long will “backwardation” last?
M&A carried-over into 2017 as several large, Will investors get back in the game to fund
corporate, Permian deals started the year off growth and M&A?
fast
Are we finally set-up for basin and/or corporate
Activity slowed with commodity uncertainty consolidation?
Investor apathy characterized the first 3 Can any basin dethrone the Permian?
quarters
4Q brought signs of life and a return to
normalcy
28Disclosure Statement
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29THE ENERGY ECONOMY IN 2018:
ELECTION IMPACTS ON ENERGY
REGULATORY ENVIRONMENT
JON ANDERSON
HOLLAND & HART LLPOVERVIEW
• Federal: Election Impacts on Federal
Regulation
• State: Election Impacts on Western State
Regulatory Environment
• Colorado: Election Impacts on Colorado
Regulatory Environment
31HOLLAND & HART PERSPECTIVE
DC
Office
32FED: OVERSIZED IMPACT ON WESTERN U.S. 33
FED: REGULATORY ENVIRONMENT 34
FED: IMMEDIATE ACTIONS: O&G PIPELINES
Pipeline Projects
• Dakota Access Pipeline
– Corps granted Easement on Feb. 7, 2017 to construct
under Missouri River
– Reversed earlier decision to require additional
environmental analysis
– Oil began flowing on June 1, 2017
• Keystone Pipeline
– Would transport crude from Canadian tar sands to
U.S. refineries
– Department of the State issued Presidential Permit for
border crossing on April 4, 2017
35FED: EXECUTIVE BRANCH ENERGY DEVELOPMENT POLICIES
• Global Policy Mandate: Review of all Agency Actions that
“Burden the Safe, Efficient Development of Domestic Energy
Resources”
• Executive Action: Rescission of Climate Change Executive
& Agency Guidance
• O&G Regulations
– EPA Methane Rule
– BLM Venting & Flaring Rule
– BLM Fracking Rule
• Clean Power Plan: Rollback
• Coal Regulations: Stripping away Obama-era policies
36FED: RENEWABLES IN TROUBLE?
• High Anxiety: Incoming Trump
Administration did not have clear or
consistent positions on renewable sector.
But certain odd statements made them
nervous:
• Trump: "I know a lot about solar — I love
solar. Except there's a problem with it. It's
got a lot of problems with it. One problem
is it's so expensive."
37FED: SOLAR
• January 22, 2018: Trump announces up
to 30% tariff on imported solar equipment.
• Impact: U.S. solar industry currently relies
on imports for 80% of supply.
• Industry Setback: $28 billion U.S. solar
industry projects major retraction.
38FED: WIND
• Wind Credit Tax Target: Initially, it was
assumed that the fiscal tax reform
measure would curtail generous wind tax
credits.
• Wind Industry Spared: The full Wind
Production Tax Credit (PTC) was
preserved, a different provision restricting
foreign investment in wind (Erosion Anti-
Abuse Tax (BEAT)) was scaled back, and
the alternative minimum tax was removed.
39FED: RENEWABLE
• Why has Wind been spared?
Wind Projects by State’s Trump won:
Trump: Non: Trump
40FED 2018: BOTTOM LINE
• Effective on Energy: Like him or not,
President Trump has taken concrete actions
to promote traditional energy development
and decrease the regulatory burdens.
• Unknowns:
– Will a Chamber flip to Dem Control in 2018?
– Will GOP retain White House in 2020?
• Assumption: Small Window of Opportunity
41STATES: 2018 ELECTIONS WILL HAVE IMPACTS 42
STATES: 2018 ELECTION OUTLOOK
• Thirty-Six states will hold elections for
governor in 2018.
• Meaning that almost three-quarters of the
nation's gubernatorial seats will be
contested.
• 17 States will have Governor vacancies
where the incumbent is not running.
43STATES: GOP FACES ELECTION HEADWINDS
• Midterm Elections: Historically, strong
shift against sitting President’s party.
• Strong Indicators for 2018:
– On generic ballot, Democrats have biggest
lead (+6 to +11) over Republicans since 2006.
– Trump’s approval rating stands at an historical
low (35%-39%) according to recent polls.
44STATES: ROCKY MOUNTAIN’S HIGH TURNOVER
NEVADA New Mexico
Term-Limited Term-Limited
COLORADO
Term-Limited
WYOMING
IDAHO
Term-Limited
Not Running
45COLORADO: HIGHER IMPLICATIONS
• Focus on Colorado Elections: Colorado sticks out as the
critical Mountain West State in 2018:
• Home to Significant Energy Resources.
• Historically, partisan divide on state energy policies.
• Democrat Governor candidates have made energy
policy a priority
• One Senate seat away from Democrat Trifecta
(Governor, House, and Senate)
• Bottom Line: If Colorado Democrats take over all three
chambers, Colorado energy policy will be impacted.
46COLORADO: GOVERNOR ELECTION
• Dems: Leading Democrat Governor
Candidate Led 2014 Fracking Ban
Movement. Two Democrat candidates have
proposed 100% Renewable Energy Portfolio
Standard by 2040.
• Republicans: Leading GOP Candidates
have made O&G industry support a focus.
• Colorado Trend: Colorado GOP Registration
down 5% since 2014.
47COLORADO: LEGISLATIVE ELECTIONS
• Democrats Close to Trifecta: Colorado
GOP only controls the State Senate – by a
slim 18-17 majority.
• Dem Advantage: Dems have NO open
seats in districts carried by Trump.
• Critical Seats: Two GOP Senate seats
are in districts with Dem registration
advantages (SD-16 and SD-24).
48COLORADO: SIGNIFICANT IMPLICATIONS
• Single Party Rule: If Democrats win Governor,
House and Senate in 2018, Colorado’s energy policy
will be severely impacted.
• Energy Key Political Issue: Democrat field focused
on policies that aggressively boost renewable
resources and challenge traditional resources.
• Colorado Energy Development Will be Impacted:
Regardless of where you stand on issue, energy
development will be a top issue in Colorado’s 2018
election.
49CONTACT
Jon Anderson
Phone: (303) 295-8566
Email: jmanderson@hollandhart.com
50NEXT SESSION IN OUR INSIGHTS SERIES
CRISIS MANAGEMENT & COMMUNICATIONS – MARCH 13
When a major health, safety, environmental, or other critical
incident occurs, a chain of events rapidly unfolds. Almost every
decision made in response will have significant consequences for
the legal issues that arise—such as government investigations and
third-party litigation. When a crisis occurs, companies must
respond swiftly and decisively.
Join us at the next session to learn insights and strategies so you
can be prepared.
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