TPH and V&E host JV summit
Energy corporates, NOC reps, and others gathered to share experiences
Energy companies and their joint-venture partners are honing deal structures to address new opportunities and lessons learned as the market for North American energy matures, speakers told attendees at the Tudor, Pickering Holt & Co. and Vinson & Elkins Joint Venture Summit Sept. 5 and 6 in Houston.
With the days of the North American energy "land grab" largely past, both sides have sought new and more creative structures to meet sharpened risk/return profiles and financing goals. Investors are finding liquids-rich properties to be subjects of still-healthy bidding wars, in part because foreign entities can borrow at attractive rates in their home country and offer appealing packages to compete with deep-pocketed private-equity sponsors. But funders are also learning how to better protect themselves from overpaying for fields that have, by now, evidenced variable results.
Oil and gas operators, for their part, are getting smarter about what they extract from investors and how to set flexible terms that allow them to deploy capital elsewhere in exchange for the new partner's drilling dollars. In return for providing know-how to overseas players, and committing to greater oversight and more human resources to manage their JV relationship, E&P's are seeking greater protections to collect on promised multi-year cash commitments from national oil companies. Tax issues can also make or break the joint venture, and they've learned which structures better fit certain projects.
The TPH-V&E Joint Venture Summit drew roughly 175 representatives from foreign national oil companies, sovereign wealth funds, private equity sponsors and institutional investors who are an increasingly vital source of capital to the oil and gas industry, alongside energy corporates eager to learn one another's experiences working with such partners.
Despite already transformative progress in the unconventional energy space, speakers still described North American development as "in the early innings." And the capital available to such projects--outside of traditional debt and equity financings--continues to mushroom, with joint venture investments in the past 5 years hitting $45 billion, nearly matching the corporate equity market inflows of $58 billion. To wit:
- As improving technology makes great results more repeatable and mistakes more avoidable, for example, sovereign funds and Asian and European energy entities are finding more ventures they can get comfortable with that provide more predictable returns.
- Institutional investors have greater choice of investment products that can slice risk and return payout schedules from energy projects.
- Financial sponsors have plenty of dry powder—$30 billion has been raised just since 2012 by natural resources private equity firms – and are moving into higher-risk opportunities with higher double-digit potential returns, such as offshore deals, in addition to looking for deals their investors want with predictable yields. Asked by Maynard Holt whether we will see more "syndicated JVs" with a long list of investors, private-equity speakers said more "club deals" are in the cards.
Scott Sheffield, CEO of Pioneer Natural Resources, gave the audience an inside view of how he and his team developed critical communication channels with JV partners such as Reliance Industries of India and Sinochem of China. TPH bankers then drew officials from those foreign players into the group discussion about how the deals had worked for them.
Chip Johnson, CEO of Carrizo Oil & Gas, outlined reasons he finds joint ventures to be worth the bother—and what cons to expect. In addition to using outside capital to reduce early stage risk, he described ways outside partners have brought technical and accounting support to his projects.
Robert Gwin, CFO of Anadarko, discussed how access to third party capital has been central to his company's development strategy, giving his partners a highly predictable cash flow stream while allowing Anadarko to redeploy freed-up cash in higher return, shorter cycle plays.
The keynote dinner drew more insights on the evolving agendas of overseas energy giants partnering with North American E&Ps, with a talk from Bill Maloney, executive vice president of development and production in North America for Statoil. Bill discussed the critical role partnering has played in Statoil's corporate history and how the upstream-partnership model paved the way for a corporate acquisition and eventual operatorship in North America.
Other JV participants echoed the theme that buying into North America is not just about "knowledge transfer" so they can take operational know-how home. It is still just as much about getting access to the resources themselves as a hedge against their country's lack of sufficient hydrocarbons. Put differently: there ways E&Ps can structure deals to either provide knowledge transfer, or avoid it.
An A-team of private financial sponsors including Marty Phillips of EnCap Investments LP, Angelo Acconcia of Blackstone Energy Partners, Chris Ortega of TPG Capital, Claire Farley with KKR, and Sam Oh at Apollo Global Management revealed ways that they are becoming more discerning about the menu of available deals. They discussed their checklists before they entered into JVs that require careful study of each side's differences and expectations, "much like a marriage." They said to expect more JVs with multiple risk and reward profiles, including in well-worn basins with legacy vertical wells and a known resource below ground, where horizontal drilling has only just begun. "That's another place we found to be not too crowded, but it still needs a lot of capital," a speaker said.
Speakers from energy companies as well as attorneys at Vinson & Elkins described how foreign players have begun hiring their own teams of land and lease experts to understand how regional differences in lease rights and land distribution might impede the pace of development and prompt them to revise their expectations about payback. Knowing "what level of development you need and what pattern" is key, said John B. Connally of Vinson & Elkins. "You may have a single landowner at a big ranch in Texas, versus negotiating with thousands of small farms with leases in Pennsylvania with a cloudier title picture."
Ward Polzin, CEO of Centennial Resource Development and a senior advisor at TPH, outlined tips on finding asset-level upstream deals in North America, the impact that play maturity has on the deal market, and where to expect additional JVs. In addition, Polzin reviewed unique ways for partners to meet originator needs and consummate a transaction while mitigating potential issues and risks.
Speakers also predicted some intriguing variations on shale deals over the next five years, including a repeat of similar JVs overseas. E&Ps who have successfully partnered with national oil companies in North America said they were ready, if the overseas partner funds it, to contemplate playing the role of operator once again, but on foreign soil, to help their partners spud wells and test regions more quickly. Global exchange of ideas and capital, and mutual cooperation to extract North American shale oil, could also help relax the current US restrictions on crude oil exports, a summit speaker predicted.