Jan. 2, 2014 For U.S. Drillers, the Days of Easy Money Are Over By Daniel Gilbert, Wall Street Journal.
Oil and Gas Companies Slash Spending as Foreign Investment Dries Up
Last year, 80 big energy companies in North America spent a combined $50.6 billion MORE than they brought in. That deficit was twice as high as in 2011, and four times as high as in 2010. The same producers have dialed back through the first nine months of 2013, though they still spent about $18.7 billion more than their cash flow.
Since 2008, deep-pocketed foreign investors have subsidized the U.S. energy boom, as oil and gas companies spent far more money on leasing and drilling than they made selling crude and natural gas.
But the rivers of foreign cash are running dry for U.S. drillers. In 2013, international companies spent $3.4 billion for stakes in U.S. shale-rock formations, less than half of what they invested in 2012 and a tenth of their spending in 2011, according to data from IHS Herold, a research and consulting firm.
It is a sign of leaner times for the cash-hungry companies that have revived American energy output. The value of deals involving U.S. energy producers plunged 48% this year from 2012, to $47 billion, the first annual decline since 2008, according to an IHS report to be published Thursday.
So U.S. oil and gas producers have started to slash spending. “The days of easy money are over,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis. “The emphasis is going to be on lowering costs.”
Foreign cash helped cover the cost of the deep wells and heavy horsepower required to unlock oil and gas from shale and other dense rock in the U.S. The need for it has been acute: Last year, 80 big energy companies in North America spent a combined $50.6 billion more than they brought in from their operations, according to data from S&P Capital IQ. That deficit was twice as high as in 2011, and four times as high as in 2010.
The same producers have dialed back through the first nine months of 2013, though they still spent about $18.7 billion more than their cash flow.
U.S. and Canadian producers are “returning to spending within their means,” analysts at Sanford C. Bernstein wrote in a research note last week that analyzed spending patterns of 50 companies.
They are also turning to other investors, including private equity and the stock market, as overseas buyers lose their appetite for American energy projects. The shift has big implications for the oil and gas industry, analysts say, because Wall Street investors tend to be more sensitive to profits and stock prices, while foreign investors have historically been more focused on acquiring energy reserves and technology.
John Walker has seen this shift up close. The chief executive of closely held EnerVest Ltd. had courted big energy companies in Japan, Korea and China when he decided to sell vast holdings in Ohio’s Utica Shale.
But more than a year later, Houston-based EnerVest and its publicly traded arm, EV Energy Partners . . . LP, have sold only a portion of their Utica acreage for $284 million, well shy of the $6 billion Mr. Walker sought for all Utica interests. The buyer came not from Asia but Oklahoma: A new company backed by private equity and led by Aubrey McClendon, the former head of Chesapeake Energy Corp. . . .
“The whole market changed,” Mr. Walker said in a recent interview. Asian investors were interested in the company’s Utica Shale assets, he said, but very few bid. EnerVest has shifted gears, marketing the Utica properties in smaller packages to appeal to other energy companies with less cash on hand.
Mr. McClendon, who left Chesapeake in April, had raised $1.7 billion by October to launch American Energy Partners. His biggest backer was the Energy & Minerals Group, a private-equity firm.
Chronically low natural-gas prices have prompted international firms to cool on American shale, with some experiencing buyers’ remorse. Royal Dutch Shell . . . PLC in July concluded that its shale properties in North America were worth $2 billion less than it had estimated. A year earlier, BHP Billiton Ltd. . . . wrote down the value of its U.S. shale-gas fields by $2.8 billion.
In 2013 natural gas prices rebounded 26% to end the year at $4.23 per million British thermal units. But that increase come off near-historic lows. Natural gas prices sunk below $2 in 2012, the lowest level in a decade, as surging output across the U.S. and mild weather left a glut of the fuel. Prices rose last year as some power companies shifted to gas to reduce use of coal.
Some of the biggest financiers of the shale boom don’t expect the major Asian and European firms to reopen the spigot any time soon.
“They’re in digestion mode,” said Ralph Eads, vice chairman and global head of energy investment banking at Jefferies Group LLC. Still, he said, “as the foreign guys have withdrawn, we’ve seen a step-up in activity from private equity.”
Riverstone Holdings LLC, a private-equity giant focused on energy, said last month it would invest up to $300 million in closely held oil-and-gas producer Eagle Energy Exploration LLC. Riverstone has committed to invest about $25 billion globally, up from $20 billion a year ago.
The IPO market, too, remains a big source of financing for energy producers. Antero Resources Corp.’s . . . $1.6 billion public offering last month was the year’s fifth-biggest among U.S. listed firms. Combined, drillers that offered shares to the public on the New York Stock Exchange have netted $2.4 billion this year, the biggest haul in five years, according to figures from data-provider Dealogic.