Energy Webinar. A Complimentary Hein & Associates LLP Webinar June 1, 2016

Transcription

1 Energy Webinar A Complimentary Hein & Associates LLP Webinar June 1, 2016 Jimmie Williams, Hein & Associates LLP Jim Harden, ASA, Hein & Associates LLP Marty Tschida CMI, Hein & Associates LLP

2 Introduction All audio lines are muted, please use our chat feature to ask questions. We will save time at the end for Q&A. This event is being recorded. A link to the recording will be sent out to all registrants later today. In order to receive CPE credit for this webinar, you will need 75% polling question participation. Please check your inbox later today for a follow up with an evaluation form that must be submitted in order to receive your CPE certificate for the course. 2

3 About Our Speakers Jimmie joined Hein s Transaction Advisory Services department in With over 27 years of experience, he specializes in assisting companies, private equity groups, and lenders with all aspects of transaction services. Jimmie Williams Principal, Transaction Advisory Services Hein & Associates LLP 3

4 About Our Speakers Jim Harden, ASA Principal, Valuation Services Hein & Associates LLP Jim serves as the firm s Business Valuation Services Leader and is a Principal at Hein. With more than 30 years of experience in the energy industry, he provides valuation, economic consulting, and litigation support services to public and private companies, investment firms and law firms. 4

5 About Our Speakers Marty Tschida, CMI State & Local Tax Manager Hein & Associates LLP Marty serves as a state and local tax manager in the Denver office. With over 8 years of experience, he provides state and local compliance and consulting services to public and private companies across a wide range of industries and regularly assists clients with complex income, severance, and sales/use tax issues. 5

6 Energy M&A Market Update Jimmie Williams, Principal Transaction Advisory Services June

7 Historical and Projected Oil Prices (WTI) After averaging $93.25/bbl in FY14, WTI prices plummeted ~48% y-o-y in FY15 to average $48.69/bbl. Oil prices bottomed at ~$30/bbl in Feb 2016 but have since rebounded to average ~$46/bbl in May-16. The recovery can be primarily attributed to declining supply (both domestically and internationally) coupled with growing demand. Looking ahead, the NYMEX strip is currently $51.25/bbl through Dec 2017, suggesting that the market is expecting an uptick from current prices but a relatively flat curve for the foreseeable future. That said, a supply disruption, or further unexpected demand increases could send prices higher. Source: CME, EIA. 7

8 Transactions Value ($B) Transaction Count North American Energy M&A Trends North American Energy M&A transactions surged to $283B (591 transactions) in FY14, but declined to only $144B (357 transactions) in FY15. As expected, deal flow has been suppressed thru April 2016, with only 74 transactions resulting in $11B. On the current pace (through Apr-16), FY16 deals will account for only 220 transactions at ~$33B in value (77% below last year). According to market data, there have been 77 E&P bankruptcies in FY15 and YTD 16. This phenomenon has resulted in less M&A transactions and in increase in restructuring. A significant amount of the restructurings have essentially been pre-packaged deals where subordinated or unsecured debt has become primarily equity with the first lien remaining primarily intact. Through FY15, transaction multiples stayed in line with the historical medians. However, given the outlook for oil prices in the near and medium term coupled with reduced activity around the drill bit, this is not a trend that we expect to see going forward. $300 $250 $200 $150 $100 $50 $- 652 $193 North American Energy Transactions $106 $283 $144 Median Transaction Multiples Year Dow nstream/midstream E & P OFS FY12 5.3x 8.0x 7.2x FY x 6.0x 4.2x FY x 5.8x 9.4x FY x 8.6x 9.9x YTD16 N/A 4.3x N/A 357 FY12 FY13 FY14 FY15 YTD16 Downstream/Midstream E&P OFS 74 $ Source: S&P Capital IQ, Hein & Associates; Excludes Power & Utilities Transactions 8

9 Transaction Value ($B) Number of Deals E&P Trends and Overview Deal flow in the E&P sector declined from 484 deals in FY12 to only 235 deals in FY15. Similarly, transaction value declined from $121B in FY12 to only $43B in FY15. On the current pace (through Apr-16), FY16 deals will account for only 160 transactions at ~$22B in value (~30% below last year). Operators are focusing on synergistic bolt-on acquisitions in lower cost regions aimed at growing their reserve base and well inventory. Assuming that oil prices hold consistent with the forward curve and companies continue to restructure (vs. divest assets), 2016 activity should continue to remain depressed E&P Deal Count FY12 FY13 FY14 FY15 YTD16 $0-500MM $501-1,000MM $1,001MM+ E&P - TEV / LTM EBITDA Multiple E&P Deal Value 25.0x $ x 21.0x $120 $121 $ x 10.0x 5.0x 0.0x 15.5x 10.6x 9.3x 6.4x 5.7x 5.3x 3.9x 5.7x 5.7x 5.0x 5.8x 8.2x 4.1x 8.2x 12.3x Median 4.3x $100 $80 $60 $40 $20 $- $67 $43 $7 FY12 FY13 FY14 FY15 YTD16 $0-500MM $501-1,000MM $1,001MM+ Source: S&P Capital IQ, Hein & Associates 9

10 Transaction Value ($B) OFS Trends and Overview The OFS market has felt the biggest impact from the oil price collapse, especially near the drill bit. Since FY14, the OFS M&A landscape has deteriorated greatly. Deal flow plummeted from 70 in FY14 to only 33 in FY15. As seen in the graph below, FY15 transaction value includes the ~$17B acquisition of Cameron by Schlumberger. Normalizing for this transaction, we see that 32 deals had a combined deal value of only ~$2B. YTD16 has been sluggish, but the announced $13B FMC/Technip merger shows there are still some large consolidations occurring. Expectations for deal volume are expected to remain low for the remainder of FY16. OFS - TEV / LTM EBITDA Transaction Multiple OFS Deal Value 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 11.3x 8.3x 5.6x 7.2x 6.3x 4.6x 3.0x 7.1x 8.5x 8.0x 11.3x 11.8x 6.2x 9.9x Median $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $9 $8 $15 $19 $17B acquisition of Cameron International by Schlumberger $2 0.0x $- FY12 FY13 FY14 FY15 YTD16 $0-500MM $501-1,000MM $1,001MM+ Source: S&P Capital IQ, Hein & Associates 10

11 Transaction Value ($B) Downstream/Midstream Trends and Overview This segment has experienced rather consistent and stable deal flow, averaging between 84 and 99 deals between FY12 and FY15. Transaction value peaked in FY14, due to the $63B Kinder reorganization transaction, normalizing for this deal yields an annual deal value more in line with prior years. Assuming a relatively flat oil price environment, 2016 deal flow and overall transaction value will likely be significantly lower than recent years. Only $2B in total transaction value in YTD Apr-16, from 15 estimated deals. Downstream/Midstream Deal Value $180 $160 $159 $140 $120 $100 $80 $60 $63 $63B acquisition of Kinder Morgan Energy Partners, L.P. by Kinder Morgan, Inc. $82 $40 $31 $20 $- FY12 FY13 FY14 FY15 YTD16 $0-500MM $501-1,000MM $1,001MM+ $2 Source: S&P Capital IQ, Hein & Associates 11

12 Overview of Oil & Gas Valuations Jim Harden, Principal Valuation and Disputes Leader June

13 $/bbl Current State of Industry- Equity $US in MMs $40,000 $35,000 $30,000 Market Value of Equity $120 $100 $25,000 $20,000 $15,000 $10,000 $5,000 $80 $60 $40 Note: Large Cap: EOG, DVN, NBL, CLR, MRO Mid Cap: NFX, CRZO, MUR, WLL, CNX Small Cap: XCO, SGY, AXAS, AREX, BBG $- J-10 J-10 J-11 J-11 J-12 J-12 J-13 J-13 J-14 J-14 J-15 J-15 J-16 Large Cap Mid Cap Small Cap WTI $20 Market Value of Equity Growth Rate Large Cap Mid Cap Small Cap EOG DVN NBL CLR MRO NFX CRZO MUR WLL CNX XCO SGY AXAS AREX BBG 12/31/2010-5% 4% 22% 38% 19% 51% 61% 39% 89% 22% -8% 24% 137% 297% 37% 12/31/ % -26% 11% 21% -22% -46% -22% -25% -20% -24% -46% 19% -12% 47% -16% 12/31/ % -16% 9% 13% 5% -29% -19% 7% -7% -12% -35% -21% -33% 4% -46% 12/31/ % 19% 34% 54% 14% -8% 142% 5% 44% 19% -21% 70% 49% -23% 53% 12/31/ % 0% -29% -32% -22% 12% -6% -26% -24% -11% -49% -45% 2% -66% -57% 12/31/ % -47% -18% -40% -55% 41% -10% -57% -65% -77% -42% -74% -64% -72% -66% 13 13

14 Current State of Industry- D/E Ratio Debt to Equity ratio has increased sharply since mid-2014 Increase is caused by erosion of equity Debt to Equity Company Name 12/31/ /31/ /31/ /31/ /31/ /31/2015 Large Cap M-10 A-10 J-11 J-11 Mid Cap N-11 A-12 S-12 F-13 J-13 D-13 M-14 O-14 M-15 A-15 $/bbl Small Cap EOG Resources, Inc. 15.5% 13.7% 13.9% 10.3% 9.5% 12.8% Devon Energy Corporation 12.5% 22.0% 26.2% 24.5% 23.7% 33.3% Noble Energy, Inc. 11.9% 17.6% 15.7% 14.3% 20.9% 26.8% Continental Resources, Inc. 7.8% 8.6% 17.1% 15.6% 22.8% 31.3% Marathon Oil Corporation 18.8% 15.9% 19.5% 17.5% 20.0% 31.5% Newfield Exploration Co. 16.3% 27.1% 31.4% 34.4% 30.3% 24.2% Carrizo Oil & Gas Inc. 22.9% 28.9% 34.9% 23.5% 29.2% 29.6% Murphy Oil Corporation 5.8% 5.0% 14.0% 16.4% 20.0% 30.7% Whiting Petroleum Corp. 9.5% 16.7% 20.7% 21.0% 33.4% 42.2% CONSOL Energy Inc. 20.1% 21.7% 23.5% 21.1% 22.8% 40.2% EXCO Resources Inc. 21.8% 31.4% 35.8% 38.3% 41.4% 44.4% Stone Energy Corp. 25.8% 24.5% 32.1% 27.1% 34.3% 44.8% Abraxas Petroleum Corp. 22.8% 22.9% 27.7% 11.3% 17.0% 36.0% Approach Resources, Inc. 0.0% 4.3% 9.0% 20.0% 37.8% 46.7% Bill Barrett Corp. 14.9% 26.3% 36.6% 30.0% 37.3% 44.7% 40% 35% 30% 25% 20% 15% 10% 5% 0% Debt to Equity Ratio $120 $100 $80 $60 $40 $20 Mean 15.1% 19.1% 23.9% 21.7% 26.7% 34.6% Median 15.5% 21.7% 23.5% 21.0% 23.7% 33.3% Mean WTI 14 14

15 M-10 J-10 S-10 D-10 M-11 J-11 S-11 D-11 M-12 J-12 S-12 D-12 M-13 J-13 S-13 D-13 M-14 J-14 S-14 D-14 M-15 J-15 S-15 D-15 M-10 J-10 S-10 D-10 M-11 J-11 S-11 D-11 M-12 J-12 S-12 D-12 M-13 J-13 S-13 D-13 M-14 J-14 S-14 D-14 M-15 J-15 S-15 D-15 Current State of Industry- Cost of Equity and Capital Cost of Equity Company 12/31/ /31/ /31/ /31/ /31/ /31/2015 Large Cap Mid Cap Small Cap EOG Resources, Inc. 9.0% 9.1% 8.3% 11.0% 9.9% 12.6% Devon Energy Corporation 9.9% 9.5% 8.8% 11.6% 10.2% 14.8% Noble Energy, Inc. 8.8% 8.6% 8.1% 9.6% 10.6% 13.1% Continental Resources, Inc. 13.6% 13.2% 12.2% 13.2% 11.9% 14.2% Marathon Oil Corporation 10.5% 10.7% 9.9% 11.2% 11.8% 17.1% Newfield Exploration Co. 12.1% 11.2% 10.3% 11.5% 10.8% 11.8% Carrizo Oil & Gas Inc. 14.6% 14.9% 13.6% 15.2% 14.6% 17.3% Murphy Oil Corporation 9.6% 9.8% 9.3% 10.4% 12.1% 15.8% Whiting Petroleum Corp. 14.4% 14.8% 13.7% 15.8% 14.2% 19.2% CONSOL Energy Inc. 11.6% 11.7% 10.4% 11.8% 12.9% 13.5% EXCO Resources Inc. 11.7% 11.3% 9.8% 10.3% 10.1% 11.4% Stone Energy Corp. 17.7% 19.6% 17.9% 20.9% 17.0% 21.0% Abraxas Petroleum Corp. 11.1% 12.2% 10.7% 11.5% 14.3% 19.3% Approach Resources, Inc. 9.6% 10.4% 10.0% 12.3% 14.4% 21.8% Bill Barrett Corp. 10.9% 10.2% 9.0% 10.7% 8.6% 14.7% Mean 11.7% 11.8% 10.8% 12.5% 12.2% 15.8% Median 11.1% 11.2% 10.0% 11.5% 11.9% 14.8% Cost of Equity $/bbl 18% $120 16% 14% 12% 10% 8% 6% $100 $80 $60 $40 $20 Mean WTI Oil Price Cost of Capital Company 12/31/ /31/ /31/ /31/ /31/ /31/2015 Large Cap Mid Cap Small Cap EOG Resources, Inc. 8.0% 8.1% 7.4% 10.1% 9.2% 11.3% Devon Energy Corporation 9.0% 7.8% 6.6% 9.0% 7.9% 9.3% Noble Energy, Inc. 8.2% 7.7% 7.2% 8.6% 8.7% 9.6% Continental Resources, Inc. 12.8% 12.2% 10.3% 11.4% 9.3% 9.3% Marathon Oil Corporation 8.9% 9.3% 8.2% 9.6% 9.7% 11.0% Newfield Exploration Co. 10.5% 8.3% 7.0% 7.3% 7.4% 9.2% Carrizo Oil & Gas Inc. 11.4% 10.0% 7.8% 11.6% 9.8% 11.5% Murphy Oil Corporation 9.2% 9.5% 8.2% 9.0% 10.0% 10.4% Whiting Petroleum Corp. 13.2% 12.4% 10.9% 12.5% 8.6% 8.1% CONSOL Energy Inc. 9.8% 9.6% 8.3% 9.5% 10.0% 7.0% EXCO Resources Inc. 9.5% 7.7% 6.0% 6.1% 5.1% 5.1% Stone Energy Corp. 12.9% 14.3% 10.8% 14.4% 9.7% 7.3% Abraxas Petroleum Corp. 9.0% 9.6% 7.8% 10.5% 12.0% 10.4% Approach Resources, Inc. 9.6% 10.1% 9.3% 10.1% 7.4% 5.8% Bill Barrett Corp. 9.6% 7.8% 5.6% 7.5% 5.3% 6.0% Mean 10.1% 9.6% 8.1% 9.8% 8.7% 8.8% Median 9.6% 9.5% 7.8% 9.6% 9.2% 9.3% Cost of Capital $/bbl 12% $120 11% 10% 9% 8% 7% 6% $100 $80 $60 $40 $20 - Mean WTI Oil Price 15 15

16 M-10 J-10 S-10 D-10 M-11 J-11 S-11 D-11 M-12 J-12 S-12 D-12 M-13 J-13 S-13 D-13 M-14 J-14 S-14 D-14 M-15 J-15 S-15 D-15 Current State of Industry- Reserve Carrying Value Enterprise Value ($)-to-proved-barrel-of-oil-equivalent ($/ Proved BOE) multiples observed reflect the significant decline in oil prices and shift in market dynamics $ / Proved BOE Company 12/31/ /31/ /31/ /31/ /31/ /31/2015 Large Cap Mid Cap Small Cap EOG Resources, Inc. $ $ $ $ $ $ Devon Energy Corporation Noble Energy, Inc Continental Resources, Inc Marathon Oil Corporation Newfield Exploration Co Carrizo Oil & Gas Inc Murphy Oil Corporation Whiting Petroleum Corp CONSOL Energy Inc EXCO Resources Inc Stone Energy Corp Abraxas Petroleum Corp Approach Resources, Inc Bill Barrett Corp Mean $ $ $ $ $ $ Median $ / Proved BOE $/bbl $US $30 $120 $25 $100 $20 $80 $15 $10 $60 $5 $40 - $20 Median WTI Oil Price 16 16

17 Quick Look at Reserve Based Lending (RBL) Revolving Lines of Credit necessary for capex, G&A, etc. Redeterminations Banks rerun borrower s reserves calculated on bank s price deck and usually include discount to the futures price strip. Normally based on proved reserves, primarily PDP. PUDs as much as 25% of the total borrowing base. Strong scrutiny given to: Exploration, timing, operational and mechanical risks Single well or field concentration Reserve mix (PDP v. PUD) Proposed capex to promote PUDs to PDPs Projected cash flows must validate ability to cover G&A expenses, debt service, including payments on other second lien debt, assuming a complete draw of borrowing base with adequate reserve tail cushion. Engineering runs are used to develop financial projections that test for compliance with energy lending policy parameters including base case and sensitivity case advance rates; reserve tail tests (based on economic half-life of the reserves or remaining cash flow after projected loan payout); and annual cash flow coverage tests. 17

18 Banks Under Pressure The Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the FDIC have reportedly been warning banks to limit their exposure to E&P companies, pressuring banks to tighten and increase the frequency of oil and gas loan reviews, and advising them that a significant number of outstanding loans to E&P companies should be classified as substandard (inferring there is uncertainty as to the underlying collateral value and/or the borrower s ability to repay the loan). These regulatory pressures combined with a volatile price and global over-supply situation, hinder E&P companies access to capital at a time when they need it the most. OCC issued the Oil and Gas Production Lending bank examination booklet (as part of the Comptroller s Handbook) in April 2014 Discusses risks in oil and gas production lending, Outlines supervisory expectations and regulatory requirements related to RBL, Loan terms ranging from three to seven years, Loan advances governed by a borrowing base that is primarily derived from the value of the borrower s proved reserves and at least semi-annual borrowing base redeterminations (in the spring and fall) that are largely based on an updated reserve report and the bank s current oil and gas price deck. 18

19 Insolvency Testing Two Types of Insolvency Tests Equitable Ignores BS and focuses only on ability to pay current debts Accounting perspective measuring default risk, write-off potential, vendor credit, potential asset sales, etc. Balance Sheet A deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the face thereof. Valuation of assets and liabilities, using three Approaches to value: Income (DCF), Market Transactions, and Cost Big differences between the two types of tests If company is insolvent, shifts in responsibilities occur for executives and BODs 19

20 Current State & Local Tax Opportunities for Energy Companies Marty Tschida, CMI State & Local Tax Manager June

21 SALT Opportunities Severance Taxes Severance taxes are one of the most overpaid taxes in the oil and gas industry. Many companies approach severance taxes as a cost of doing business and do not recognize the impact to their financial positions. Companies have revenue, accounts payable, or other non-versed personnel completing reports that are costing companies millions in overpayments. Tax rates can range from 4% - 35% of each dollar of production. 21

22 SALT Opportunities Severance Tax Basics Two main methodologies to calculate taxable base: Volumetric and Valuation based. Volumetric: Volume X Tax Rate Valuation: Value received less allowable deductions X Tax Rate. Also referred to as a netback calculation. Certain states utilize one method for gas, a different for oil. 22

23 SALT Opportunities Severance Tax Valuation based severance tax is generally overpaid more than volumetric based. Providing the most opportunity for refunds. State can apply valuation based on: A Netback Calculation Comparable Production Method : Similar production value in similar location and environment Negotiated value 23

24 SALT Opportunities Severance Netback Calculation Netback calculation attempts to value product at a point of valuation. Valuation point differs from jurisdiction Separator Dehydrator Wellhead 24

25 SALT Opportunities Deductions for Severance 25

26 SALT Opportunities Deductions for Severance Deductions allowed for increasing value of product from point of valuation. Certain costs incurred before and after the point of valuation might be nondeductible: Extraction costs Water hauling Tertiary costs Deductions include: Third party expenditures Owned asset RofI: Depreciation Owned asset ROI: BP America Production Co. v. Colorado Department of Revenue (2016) Operating expenses: labor, insurance, fuel, etc. 26

27 SALT Opportunities Severance Exemptions Many states offer exemptions to either reduce or eliminate the tax rate States differ on eligibility Certify wells (Texas and Utah) Statutory (Colorado and Utah Marginal wells Commonly referred to as stripper wells Stripper analysis by product versus well Qualification amounts vary by jurisdiction: 90 MCF of gas or 15 BBLs of oil per day (Colorado) versus 60 MCF of gas or 20 BBLS of oil per day (Utah). 27

28 SALT Opportunities Severance Exemptions Exemption by owner and use Exempt entity: Government entities, Indian, and other. Lease use: Generators, compressors, other equipment Ad valorem tax credit in Colorado 28

29 SALT Opportunities Severance Credits and Rates Enhanced production Deep well Developmental well Horizontal well Recompletion High cost gas wells Inactive wells New wells 29

30 SALT Opportunities Sales Tax Sales and use tax refunds could provide substantial cash back to oil and gas companies. Sales and use taxes are one of the most complicated taxes. Out of state vendors Occasional sales Bundled expenditures Many vendors will default on charging tax in order to be conservative, when no tax was due on the transaction. Companies having large capital expenditures should be mindful of the following expenditures and ensure the correct amount of tax was paid. 30

31 SALT Opportunities Sales Tax Purchases of manufacturing, pollution control, and real property equipment potentially refundable. Separators, tanks, environmental control devices (ECDs), pipelines, casing, etc. Non-taxable services True object test Fracing, cementing, fishing, etc. M&A activity and sales tax impact Sale of assets vs. stock 31

32 Q&A Session We would now like to give our attendees a chance to ask questions. To ask a question, please submit a question via the chat box on the bottom left-hand corner of your screen. If we do not get to your question during the webinar, our presenters will follow up with you via . 32

33 Contact Information Jimmie Williams Principal, Transaction Advisory Services Hein & Associates LLP (713) Jim Harden, ASA Principal, Valuation Services Hein & Associates LLP (713) Marty Tschida, CMI State & Local Tax Manager Hein & Associates LLP (303)