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Energy Finance Journal

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A quarterly update of global energy activity and trends in the oil and gas markets. This publication includes a forecast of 2010 energy commodity prices and a review of recent M&A activity.

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Energy Finance Journal

  1. 1.   The Energy Finance Journal  Activity in the Global Oil & Gas Industries  November 1, 2010   
  2. 2.   After a period of weak demand growth for crude oil and natural gas, energy industry activity is showing some signs of improving. In 2008 and 2009, disruptions in the world financial system spread to the energy sector as demand retreated. In the first nine months of 2010, total U.S. petroleum demand increased 1.8% over the same period in 2009 to an average 18.93 million barrels per day, according to the American Petroleum Institute. Drilling Strength Continues Over Last Year Baker Hughes Inc. reported the number of rigs actively exploring for oil and natural gas in the U.S. increased by 3 to 1,672 (see Figure 1). Of these, 58 percent were exploring for natural gas and 42 percent for oil. The overall rig count stood has increased by over 56 percent over the 1,069 level from one year ago this week. The peak and trough rig count were 4,530 in 1981 during the oil boom, and a record low of 488 in 1999, respectively. Figure 1: U.S. Energy Indicators   1 Previous 5-year average for the week of 10/22/2010 Oil and Gas Price Forecasts This winter, the Energy Information Agency (EIA) forecasts the price of West Texas Intermediate (WTI) crude oil to average about $80 per barrel, a $2.50‐per‐barrel increase over last year. By the end of 2011, the EIA forecasts average WTI prices to increase gradually to $85 per barrel as domestic and worldwide economic conditions improve. This forecast assumes U.S. gross domestic product (GDP) to increase by 2.6 percent in 2010 and 2.1 percent in 2011. Increasing world oil demand will also be supportive of higher crude oil prices. Demand strength across the global petroleum product base, together with stabilization of the manufacturing sector, the recovery from the Eurozone crisis, along with the expectation that the Federal Reserve is likely to remain biased toward continued easing all support higher prices. The EIA outlook forecasts oil prices increasing from $77.97 in 2010 to $83.00 in 2011 (Figure 2). The NYMEX one-year forward strip on WTI crude oil contract prices closed at $84.27 per barrel on October 29, 2010. 10/29/2010 Year Ago Percent Change Crude Oil (West Texas Intermediate) $81.43 $78.40 3.9% Natural Gas (Henry Hub) $4.04 $4.76 -15.1% Crude Oil Stock (thousand barrels) 1,859 1,776 4.7% Natural Gas Storage (billion cubic feet) 3,754 3,442 1 9.1% Rig Count (Baker Hughes U.S. Rotary) 1,672 1,069 56.4% OSX Index (Philadelphia Oil Service Index) 210.23 194.36 8.2% Figure 1
  3. 3.   Figure 2: West Texas Intermediate Crude Oil Price   Source: Energy Information Agency (EIA Weekly Petroleum Status Report, October 13, 2010) The EIA forecasts the Henry Hub annual average spot price to increase from $4.47 per million Btu (mmbtu) in 2010 to $4.58 in 2011 (Figure 3). The NYMEX one-year forward strip on Henry Hub natural gas contract prices closed at $4.25 per mmbtu on October 29, 2010. Figure 3: Natural Gas (Henry Hub) Spot Price Source: Energy Information Agency (EIA Natural Gas Weekly, October 13, 2010) At the end of this year’s injection season (October 31), natural gas inventories were at more than 3.75 trillion cubic feet (tcf) and this represents the second highest underground storage level on record for the
  4. 4.   month of October (Figure 4). This is about 3 percent lower than last year’s record level, according to Energy Information Administration. For the week of 10/22, the implied net injection was 71 bcf, higher than last year’s net injection of 24 bcf and the 5-year (2005-2009) average injection of 45 bcf, marking the seventh straight week that 2010’s injections exceeded 2009's. The attributes that have driven storage levels higher over the past month and a half include mild weather, relatively low heating demand, and increased production compared to last year. Going forward, the number of wells awaiting tie-in or completion and the producer-driven pipeline infrastructure under development will bring new gas on line, but the demand implications of declines in the conventional production basins and replacing some coal-fired generation should offer some tightening. Figure 4: Natural Gas in Underground Storage Compared with 5-Year Range Source: Energy Information Agency (EIA Weekly Natural Gas Storage Report, October 22, 2010) Note: The shaded area indicates the range between the historical minimum and maximum values for the weekly series from 2005 through 2009. Mergers, Acquisitions, and Divestitures Globally, corporate acquisition and asset divestiture activity exceeded $136 billion on 491 energy transactions through the third quarter. Full year deal value is expected to top $150 billion in 2010, according to PLS, Inc. In the first half of 2010, U.S. upstream divestitures remained at high levels as companies sought to eliminate non-core assets or shift investment capital in the direction of higher value unconventional plays. In the third quarter however, deal activity declined to the lowest level in a year. Going into the fourth quarter, there remains a high volume of deals in the U.S. market, especially in the Permian Basin, that are anticipated to push 2010 to the highest level for deals in three years.
  5. 5.   During the third quarter, BP divested nearly $9 billion in properties worldwide in its effort to raise cash in anticipation of damages related to the Macondo well blow out. This accounted for approximately 20 percent of worldwide deals in the quarter. Apache Corporation has been the largest purchaser, spending $7.1 billion for BP's stakes in the Permian Basin, Canada, and Egypt. Including the purchase of these BP divestitures, in 2010 Apache has spent $12.1 billion so far with additional corporate acquisitions of Mariner Energy and a roll up of Devon's shallow Gulf properties. Significant 2010 U.S. corporate mergers, acquisitions, and divestitures to date have included: Third Quarter 2010:  Apache Corporation purchased BP's Permian Basin assets for $3.1 billion  Concho Resources acquired New Mexico independent Marbob Energy in a $1.65 billion merger  Vedanta Group purchased a 51 percent stake in Cairn India for $8.9 billion  Lukoil re-purchased ConocoPhillips' 13.05 percent stake in the Russian major for $5.8 billion Second Quarter 2010:  ConocoPhillips' sale of its Syncrude Project stake to Sinopec for $4.6 billion,  Talisman Energy's $1.8 billion in Alberta assets, First Quarter 2010:  CONSOL Energy's acquisition of Dominion's remaining oil and gas producing assets for $3.475 billion  SandRidge's acquisition of Arena Resources for $1.6 billion
  6. 6.   Acumen Capital Advisors is a private investment bank that offers strategic financial advisory services to senior level middle market entrepreneurs and corporate executives. Our mission is to attain superior business results and financial success for our clients in a reliable, prompt and trustworthy environment. The Energy Finance Journal is authored and published by Marcus Kergosien, managing partner and founder of Acumen Capital Advisors.