David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Financial Insight: MLPs and the M&A Marketplace

    This is an informative article by Jeff Kramer and may be of interest to subscribers. Here is a section: 

    All that being said, it is somewhat surprising that the wholesale-related MLP stock prices are soft, despite decent margins and overall stable fuel demand and strong profitability.  For example, CrossAmerica Partners LP (linked with CST) is down 29% from last year's high, strong Global Partners LP is down 26%, and Sunoco LP is down 38%.

    Granted, equity supply continues, as indicated by the initial public offerings of GPM Investments and Empire Petroleum Partners. However, these are relatively small equity offerings of $100 million apiece, not normally enough to kill the overall equity side, unless the demand for these equities has tapered off considerably. What might be wrong with this seemingly good picture for downstream MLPs? Let me offer some possibilities:

    Oil prices. Should oil prices drop much further than now assumed by the marketplace, all downstream petroleum margins could suffer over time. Most vulnerable might be U.S. refiner margins, which are currently “to the moon,” because of the wide WTI-Brent crude-oil spread and the lunacy that U.S. producers cannot export their crude oil, yet U.S. refiners can export products at world-market prices--ah, heaven! Lower oil prices could impact margins in general as working capital requirements decline, and, more importantly, the 1% discount for prompt pay offered by branded refiners becomes worth less to middleman distributors. Perhaps Wall Street simply feels the “bloom is off the rose” for anything oil related for now.

    Are purchase multiples too high? There has been spirited competition for M&A deals from MLPs, but equally from refiner-marketers such as Marathon/Speedway and Shell, as well as from many solid retail oriented players who want to use their strong cash flows and credit lines to expand, yet find organic growth too slow. Thus, there is a huge urge to merge by many players, as on Wall Street in general these days. MLPs have the absolute need to grow their dividends but, depending on their complicated structures, have quantifiable EBITDA multiple limits as to what they can pay and still have the acquisitions be accretive to earnings. And, as we all know, not all acquisitions work as planned, so the need can increase to acquire more to stay ahead of earnings. Many are fortunate because the interesting web of MLPs, general partners, sponsors, long-term financing vs. short-term financing, and lines of credit give them a smorgasbord of financing options while most interest rates are at historic lows. It’s a chief financial officer's best dream--or nightmare.

    Interest rates. For whatever reason, unforeseen right now, might interest rates go higher than anticipated?

     

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    Musings from the Oil Patch July 14th 2015

    Thanks to a subscriber for this edition of Allen Brooks report for PPHB which may be of interest to subscribers. Here is a section: 

    While there really was nothing unique in the observations they shared about the investment process or the desirable criteria, the scary fact was (is) the volume of private equity money seeking a home in the energy industry. According to Mr. Ryder, energy private equity investing as a percentage of total energy sector merger and acquisition activity had climbed from under 2% in 2000 to over 20% in 2014. During the first quarter of 2015, the energy private equity funds were investing at that slightly greater than 20% rate until the announcement of the $70 billion BG Group (BG-NYSE) and Royal Dutch Shell (RDS.A-NYSE) deal. We have not yet seen updated figures so we don’t know how the current state of the industry may have changed in the second quarter.

    As the First Reserve article pointed out, the increased size of the investment pools forced the group to abandon its proven strategy of making smaller investments in smaller enterprises. First Reserve was forced to increase the size of its investments, meaning it needed to invest in larger deals. This investment shift is an economy of scale issue. To hold to its original investment philosophy, First Reserve would have had to make many more investments in each fund stretching the human resources of its investment team. It would have also potentially diluted the potential investment returns anticipated when putting the fund together, although given the performance of those funds a broader pool of investments might have provided them with better results. At the same time it was being forced to alter its investment strategy, First Reserve may also have been a victim of the “feeding frenzy” among energy private equity funds and non-energy new entrant private equity funds that could have inflated deal valuations. That feeding frenzy may have been the biggest problem if one believes that since the financial crisis in 2008-2009, the energy industry has been in a long-term downturn, just as happened during the 1980’s. We remain concerned about the magnitude of private equity money seeking investment opportunities in the energy business. We concluded our prior article on energy private equity funds with the following observations, which we still believe are correct.

    “The uniformity of thinking among private equity players is a bit scary. Group-thought is usually not a successful strategy. The volume of public capital is not only surprising, but discouraging if one believes the industry needs to experience pain before a true recovery can begin. Lastly, in looking at the presenters and the audience, there were very few present that experienced the 1980’s forced re-structuring of the energy business following the bullish experience of the 1970’s. In our discussions that day, we encountered another old-timer who referenced the 1980’s downturn starting in 1982, three years before when most who look at the industry’s history think it began. We were there then, and this guy had it exactly right. This industry is headed for significant change.” In our view, the industry’s changes are just now beginning to emerge. 

     

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    Mexico Battles Bad Timing in 1st Sale of Oil Fields Since 1930s

    This article by Adam Williams and Juan Pablo Spinetto for Bloomberg may be of interest to subscribers. Here is a section: 

    Mexico waited 77 years to invite foreign oil producers back into its borders. That was one year too many.

    The move to lure tens of billions of dollars from the likes of Exxon Mobil Corp. will be put to the test for the first time at an oilfield auction on Wednesday. With oil prices down by about half since last year, five of 38 potential bidders including Glencore Plc, Noble Energy Inc. and even Mexico’s state-owned oil producer have pulled out.

    President Enrique Pena Nieto moved to end the state monopoly after poor drilling infrastructure and technology failed to reverse a decade-long production decline that reduced government revenue. To lure investments now, Mexico will probably get a much smaller share of profits than it would have a year ago.

    “They shaped expectations at a $100-per-barrel market and we are way off that now,” Wilbur Matthews, chief executive officer of San Antonio-based Vaquero Global Investment, which oversees more than $100 million of assets including oil-producer bonds, said by phone July 10.

     

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    Email of the day on oil prices and Canadian producers

    I'm looking for your view again on the Canadian energy sector.  I obviously am aware of the effect technology has had on the shale boom etc...I do disagree with most assertions that there is a flood of supply in oil at these price levels.  Anyway, aside from that- how do we go into this massive global GDP growth phase and not require an abundance of resources of all kinds?  Technology has brought on supply but they require much higher prices to break even.  Help me reconcile how we have this huge growth backdrop and yet the market is pricing in disaster levels in Canada?  Is the energy sector forever dead or is this a tremendous buying opportunity?   Thanks as always. Hope you and your family are well.

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    U.S. Justice Department Opens Antitrust Probe Into Airlines

    This article by David McLaughlin may be of interest to subscribers. Here is a section:

    U.S. airline shares tumbled, erasing an earlier gain, after the initial Associated Press report on the inquiry. Citing a document, the AP said the department was investigating whether carriers were colluding to help prop up airfares.

    The Bloomberg U.S. Airlines Index slid 4.7 percent, the biggest intraday drop since June 8, at 2:03 p.m. in New York. The gauge rose as much as 1.7 percent earlier.

    Messages left with the four largest U.S. carriers -- American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co. -- weren’t immediately returned.

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    Musings from the Oil Patch June 30th 2015

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on Canadian oil supply:

    The significance of the oil sands on global oil supply cannot be ignored. Over the past five years, oil sands output has grown by 1.1 mmb/d, fully one-fifth of the total oil production growth for North America. The impact of lower oil prices on the oil sands cannot be missed. Early in 2014, Western Canada Select, a heavy oil price market, was selling at $86 a barrel. By the end of March, that marker was trading below $30 a barrel. This is when, according to oil industry consultant Rystad Energy, new oil sands projects require a price of $100 a barrel in order to breakeven. What’s been the impact of the price decline on the Canadian oil industry?

    In February, Royal Dutch Shell (RDS.A-NYSE) withdrew its application to build a new 200,000 barrels per day (b/d) mine at Pierre River, north of Fort McMurray. In May, the company announced it would delay for several years a new 80,000 b/d in situ oil sands project at Carmon Creek near Peace River. The significance of these projects is highlighted when one realizes that Shell currently operates 225,000 b/d of oil sands production. Other projects are being delayed as companies plan to bring much smaller in situ projects into production at a delayed pace in order to manage their cash flow and capital investment requirements.

    A June 16th report from Ernst & Young LLP projects a 30% decline in Canadian oil sands spending, bringing this year’s investment to $23 billion, down from an expected $33 billion. The result of this spending decline and the announcements by several producers to stop or delay new oil sands mines and in situ projects means total oil production will be 17% lower by 2030 compared to the target output in the 2014 forecast provided by the Canadian Association of Petroleum Producers (CAPP).

    In addition to cutting new investment, oil sands producers are looking at ways to cut their operating costs to help improve their breakeven prices. Suncor Energy (SU-NYSE), a significant oil sands producer, has said it plans to replace 800 dump truck drivers with automated trucks at its oil sands mines. That move, which is a huge boost for autonomous vehicle technology, is projected to save the company C$200,000 per driver.

     

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    Coal Shares Jump After Supreme Court Strikes Down Mercury Rule

    This article by Tim Loh for Bloomberg may be of interest to subscribers. Here it is in full:

    U.S. coal shares jumped after the Supreme Court struck down the Obama administration’s mercury and acid gases power plant rule, saying it hadn’t considered the billions of dollars in costs before issuing the rule.

    Arch Coal Inc. jumped as much as 19 percent, Peabody Energy Corp. climbed 15 percent and Alpha Natural Resources Inc. was up 14 percent in intraday trading after the ruling was announced Monday.

    The court’s decision calls into question an Environmental Protection Agency rule that targets mercury and acid gases. The rule has led to the closing of dozens of coal-fired power plants over the last two years.

     

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    Fintech reloaded Traditional banks as digital ecosystems

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

    Isolated solutions are often only implemented in a fragmented fashion from division to division. Innovation processes are still being driven forward laboriously using an outdated silo approach. Furthermore, many banks' command of the global “language of the internet” is still deficient. The banks will not achieve resounding success using such methods. Digital change requires far-reaching structural reforms that extend beyond all internal and external bank processes and systems.

    The new market players from the non-bank sector, by contrast, have an almost perfect understanding of the language of the internet. First and foremost it is the scarcely regulated digital ecosystems, but there are also many fintechs that are using their platforms and ingenious “walled garden” strategies to dominate markets across a range of sectors. Their recipe for success is based on the harmonious interplay between implemented hardware and software. Via the optimum interlinking and utilisation of compatible and interoperable standards/technologies we – the platform-spoiled consumers – are courted with attractive products and services conveniently, globally and from a single source. 

    Traditional banks could do this, too, however. This now provides the opportunity to swiftly learn and adopt the strengths and particularly the monetarisation strategies (walled gardens) of the successful digital ecosystems.

    There are many benefits to be gained by banks that transform themselves into platform-based, digital banking ecosystems. Apart from easy access to numerous personalised products and services, including those of external providers, as well as a more secure IT environment, the customer can also make interactive contributions on the financial platform in a variety of useful networks. Furthermore, the banking ecosystem offers a flexible corporate architecture that will in future enable as-yet-unimagined technologies to be docked onto one's own infrastructure in a timely fashion and at an acceptable cost.

     

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    The Way Humans Get Electricity Is About to Change Forever

    This article by Tom Randall for Bloomberg may be of interest to subscribers. Here is a section: 

    The price of solar power will continue to fall, until it becomes the cheapest form of power in a rapidly expanding number of national markets. By 2026, utility-scale solar will be competitive for the majority of the world, according to BNEF. The lifetime cost of a photovoltaic solar-power plant will drop by almost half over the next 25 years, even as the prices of fossil fuels creep higher.

    Solar power will eventually get so cheap that it will outcompete new fossil-fuel plants and even start to supplant some existing coal and gas plants, potentially stranding billions in fossil-fuel infrastructure. The industrial age was built on coal. The next 25 years will be the end of its dominance.  

    2. Solar Billions Become Solar Trillions
    With solar power so cheap, investments will surge. Expect $3.7 trillion in solar investments between now and 2040, according to BNEF. Solar alone will account for more than a third of new power capacity worldwide. Here's how that looks on a chart, with solar appropriately dressed in yellow and fossil fuels in pernicious gray:  

    3. The Revolution Will Be Decentralized 
    The biggest solar revolution will take place on rooftops. High electricity prices and cheap residential battery storage will make small-scale rooftop solar ever more attractive, driving a 17-fold increase in installations. By 2040, rooftop solar will be cheaper than electricity from the grid in every major economy, and almost 13 percent of electricity worldwide will be generated from small-scale solar systems.

     

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    Richard's Bay coal market faces changes after complaints to globalCOAL

    This article by Sarah McFarlane for Reuters dated June 2nd may be of interest to subscribers. Here is a section: 

    One trader told Reuters that by entering bids on screen that no seller is in a position meet, a bidder could artificially push up prices.

    "The way you do that is by the timing and size of those parcels," the trader said.

    As the market is not particularly liquid, bids and offers help inform pricing on the API 4 index, which is calculated using data gathered by Argus and IHS McCloskey.

    Traders said that the concerns over artificially high bids pushing up coal prices on the API 4 index had cut the volumes traded.

    API 4 trade volumes between January and May fell by almost a third from a year earlier, data published by the CME and ICE exchanges showed.

    The index is the world's third largest behind the API 2 benchmark for northern European coal markets and globalCOAL's Newcastle benchmark index for thermal coal in the Asia-Pacific.

     

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