There Are Shifts Underway in Private U.S. Energy Investment

There Are Shifts Underway in Private U.S. Energy Investment

by | published October 16th, 2019

Later this week, I will be having discussions with some heavyweight energy investors.

However, these discussions will be a bit unusual for one reason:

Everybody who will be participating in the session already has a good idea of what the conclusions will be.

In other words, this is less a round of figuring out where the trends are going then it is authenticating how pronounced those directions are. And as the energy mix continues to change, so too are the targets set out by the money folks shifting.

Yes, investment in traditional energy projects and sectors will continue. But there are important revisions underway in where money is being directed.

There are four developments in this regard that are important…

Changing Energy Priorities

First, while still an option in some select cases, private investment into traditional oil and natural gas production is nonetheless declining.

This is not because there is a massive shift underway to alternative energy (although I will have something to say about that in a moment). It also does not address the levels of capital expenditures by the operating companies themselves.

What is underway from the outside money involves what colleagues call “cycling.” And there are a range of factors – preeminent among them calculations on market price, demand levels, and production costs – involved.

The deemphasis does not result because they have suddenly converted to a non-hydrocarbon mindset; these guys are interested in making money. Rather, the profit margins have narrowed.

Now, this needs to be put into perspective, and it brings us back to one of the reasons the term cycling is used. The producing sector is nearing a point where the current well count will need to be replenished.

New drilling methods (e.g., multi-well platforms, improved angular drilling, more effective fluid mixtures and applications) are allowing extraction levels to rise from fewer aggregate drilling locations.

That translates into overall lifting volume remaining at or above present levels from fewer physical locations. But that’s not the approaching problem.

Field conditions are.

Changes in the M&A Environment

In the environment of lowered prices since late in 2014 companies have delayed developing new fields. Most of the new wells are of the step-out variety – that is, drilled out from existing production locations.

Put another way (and a subject I have addressed previously here in Oil & Energy Investor), these are half-cycle wells where the infrastructure, services, pipelines, etc. are already in place. Full-cycle wells require the additional expenditures for all such field needs.

Maintaining domestic production will, at some point, require that new fields be developed even within already prolific basins like the Permian and Bakken. Then, additional funding will be coming beyond the finance provided by the operating companies directly.

But we are not there yet.

Second (once again as I have discussed recently in Oil & Energy Investor), the outside interest in prodding funding for mergers and acquisitions (M&A) is going down. The primary plays here had been in places like the Permian where small companies were being absorbed by bigger players.

This obscure treasure is buried beneath U.S. soil (and it’s worth $1.4 trillion)

Most of this was accomplished via the leverage route, which means the financing of lines of credit. The risk for such debt was spread out into a network of private sources to allow the primary provider some protection.

The M&A market is now largely limited to larger companies improving the amount of their booked reserves by acquiring smaller company reserve amounts. Remember, when it comes to publicly traded oil and gas producers, the value of their stock in secondary trade is based on the oil in the ground, not what was lifted out and sold yesterday.

Again, the M&A market will reach a point (largely due to the debt problems of the most vulnerable companies) where business will pick up. But there would need to be a sustained average market price for West Texas Intermediate (WTI), the benchmark crude rate used for future contracts cut in New York, above $65 a barrel for there to be renewed life here.

Okay, then where is the money going? What are the new “darlings” of the well-healed in energy?

These are the last two of our points today.

The New “Darlings” of Energy

Third, energy efficiency moves are attracting increasing focus from investors.

Here, there are a range of applications covering storage (batteries at the head of the list), retention, improved delivery systems, reducing energy loss, and improved energy use.

The bottom-line view holds that with overall global energy demand increasing, especially when it comes to electricity, more efficient applications translate into greater profitability. And when efficiency results in lowered prices for consumers, there is invariably a greater amount of energy used.

Finally, alternative and renewable sources are increasingly part of the investment package. It is not, as I mentioned above, because some massive shift is underway.

In some respects, that shift has taken place already as solar, wind, and biofuels have become a staple part of the overall energy mix.

Additionally, the three main worldwide energy sources today – oil, natural gas, and coal – will still be holding down those slots twenty years from now, especially in Asia, where the focus of international energy demand has been rapidly moving.

The important point to recognize is this one. Even comprising less than 20% of the mix by 2035, renewables will still comprise the fastest growing energy component. We are well past any proof of concept phase.

Investment attention is now turning to the technologies, services, and equipment needed to integrate the new energy infrastructure, a rising part of which will be using renewable sourcing.

Given that power grids nationwide are well beyond life expectancy an opportunity to revise transmission and provision is already approaching. And that is probably fueling investor interest more than anything else.




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  1. October 17th, 2019 at 18:30 | #1

    So, since mid-stream companies are primarily deriving their revenue from the quantity of product that is conveyed through their pipelines or compressed by their compressors or stored in their storage tanks and the volume of product moving through or utilizing these facilities is at record levels, why are the unit prices of these entities mostly doing so poorly?

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