Around 12,300 energy industry professionals (nearly 1,100 more than last year) attended the 2018 NAPE Summit at Houston’s George R. Brown Convention Center, February 5-9, to hear C-level experts share their thoughts on today’s global oil and gas industries.
With prices finally above $60 per barrel, attendees experienced a newfound, but cautious, optimism. Higher prices mean a U.S. production boost, but how will that boost affect prices? Will it outpace global demand?
“The sentiment of the industry right now is on an uptick,” Pherl Brossman of Houston’s Latitude Resources LLC told Hart Energy. “It’s a conservative optimism. You look at world oil demand, and were basically in a supply-demand parody.”
“The problem with our industry is we only know one speed – and that’s a hundred miles an hour,” John Allred, Vice President of Production & Completion Operations at Opal Resources LLC told Hart Energy. “We all gear up at the same time, and guess what - with a price drop we could have some fallout. I’m hearing a little bit of that on price pressure.”
Chesapeake Approaching Free Cash Flow Neutrality
Chesapeake Energy President and CEO, Doug Lawler, shared insights on how creativity and innovation can unlock value in producing assets in his keynote presentation, “Chesapeake Energy: The Transformation and the Future.”
Approaching his fifth year of leadership, Lawler’s strategy for stabilizing Chesapeake finances focuses on divesting (at the right price), cost-cutting, and “investing every dollar in the best location, not the next location.”
“Chesapeake remains fixed on cutting away more debt—up to another $3 billion - as soon and as quickly as we can,” Lawler said. “But in a low-price environment, we’re not going to just liquidate our assets. It needs to be accretive.”
Recently, the company recently exited its northern Anadarko Basin project and signed agreements for Midcontinent sales of undeveloped assets, business property, producing properties and equipment from its Mississippian Lime operation. Chesapeake is also selling 3,000 producing wells and 238,000 net acres from its western and central Oklahoma assets, using its divestiture proceeds to reduce outstanding debt and refinance other debt.
Chesapeake also cut lease operating expenses from $1.4 billion in 2012 to $800 million in 2017.
“We’re operating on a capital efficiency of about one-seventh of what was spent four and five years ago,” Lawler said.
And Lawler’s strategy works. Chesapeake has cut corporate debt by 50% and eliminated 75% of debt maturing across the next two years. It hopes to achieve free cash flow neutrality in 2018 while honing in on its Gulf Coast and Appalachian Basin and Gulf Coast gas assets and its Midcontinent, Eagle Ford, and Power River Basin oil production.
U.S. Production to Supply Growing Global Oil Demand
Regarding 2018’s energy market forecast, Texas Railroad Commissioner, Ryan Sitton, said he expects West Texas crude prices to remain around $58 to $66 per barrel. He also predicts significant global oil demand growth, increasing by up to 1.9 MBPD in 2018.
“There’s no problem with demand,” he said. “In the past year, international crude oil stockpiles dropped at a rate of about 400,000 bpd,” Sitton said.
He also projects that the global economy will see 3.6% growth in 2018, the highest growth in eight years, “And nothing drives energy consumption like economic growth,” said Sitton.
“In fact, the world may even struggle to fill global demand growth six years from now,” Sitton said. “This dilemma would cause oil prices to increase, enabling operators to extract hydrocarbons from high-cost regions that are too pricey for today’s oil market. The world’s oil production could grow to 110 MBPD to 115 MBPD within the next 20 years.”
“The problem is, to produce that oil, it will cost more than what it costs now to produce 100 MBPD,” he said. “As increased demand continues to squeeze supply, operators will be incentivized to develop more “tier-two” acreage, which can be found in abundance in plays like the Eagle Ford,” Sitton said.
Pros and Cons: International Deepwater Vs. Lower 48 Onshore
In deciding between international deepwater projects versus US onshore, Graeme Gordon, Hess Corporation’s exploration strategy, commercial and planning manager, and Steven P. Otillar, Akin Gump Strauss Hauer & Feld LLP partner explained there are currently pros and cons to both.
US plays are more predictable, but international projects can generate more cash flow in the long run. The Lower 48 generate positive cash flow pretty quick, while international projects can take eight to ten years to get out of the negatives.
A strong strategy for international deepwater involves examining economic across the entire timeline, weighing well prices, controlling cost structure, and creating the lowest possible breakevens, Gordon explained.
“Obviously, if you’re going near infrastructure it means that cash flow can be a lot less, but if you’re going for a greenfield you have to take some risks upfront if its big enough,” Gordon said.
“A lot depends on your assets and your current portfolio,” Otillar said. “I still don’t feel the international pull that we’ve seen before because it just seems that on the supply side there’s still a lot of room to grow.”
For Lower 48 onshore projects, Otillar expressed concerns around current acreage prices and over- drilling in core areas like the Delaware Basin, suggesting companies take on riskier, unconventional areas to pull better returns.
“As we’ve run out of reasonably priced core areas I think the threat is not so much the international. I think it’s just a different skill set entirely. It’s going to be folks looking at different opportunities around the world,” he said.
In addition, keynote speaker Wil Van Loh (Founder and CEO of Quantum Energy Partners) shared interesting insights on the changing role of private equity in the energy industry, while executive VP and chief commercial officer for Cheniere Energy, Anatol Feygin, shared much-awaited thoughts on the future of US LNG exports.
Jackson Walker LLP partner, Michael P. Pearson, moderated a thought-provoking panel discussion, “Navigating Through the New Oil and Gas World,” involving board director and executive consultant for Gastar Exploration Ltd., Jerry R. Schuyler, Gardere, Wynne, Sewell, LLP partner, Jason B. Binford, and Ares Private Equity Group partner, Nathan W. Walton.
After the success of this month’s 2018 NAPE Global Business Conference and Summit, we are excited to see how companies choose to tackle upcoming challenges and restructuring and take advantage of the changing role of private equity and other key opportunities. We’ve come a long way and look forward to seeing where we are headed from here.