September 2010 - Association for Corporate Growth

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THE PULSE Measuring the Impact of Gulf Spill Dealmakers weigh in on how activity in the energy sector is going to be affected by the spill and what new risks have emerged in the sector since the Deepwater Horizon blowout Uncertainty abounds in the traditional energy sector with: Congress proposing new forms of regulation, the turmoil of changes at the old Mineral Management System, the administration’s public involvement in the boardroom and continuing questions surrounding geopolitical crisis in oil-producing nations. Investors in the energy industry are asking the question, “What will the industry hold?” The cost of capital for traditional E&P companies last year was 7-11 percent. Now industry experts are suggesting it may be as high as 15- 22 percent. That shift in the cost of capital indicates the risk that the market perceives, not from reality, Shimon Steinmetz but from a lack of clarity as to what the crystal ball holds. November’s mid-term elections could hold the answer. Or a simple shift in the Middle East could send oil prices to levels where the risk/return ratios rebalance. This uncertainty that now plagues the traditional energy sector will continue to ignite investment interest in the alternative energy sector. I think the future of energy deals in the wake of BP is a tale of one catalyst telling two stories, one of cautious slow moving investors and the other of nimble investors seeking to capitalize on uncertainty. —Shimon Steinmetz, Senior Associate, Corporate Advisory & Restructuring Services, Grant Thornton LLP The primary impact of the Gulf oil spill on dealmaking in the energy sector is that it has highlighted the greatest risk of all – political risk! So long as we have this administration and this c o n g r e s s i o n a l leadership with control, it is foolhardy to invest in U.S. energy. Investors with James Craig expertise in, and capital allocated to the energy sector, would be wise to look overseas. —James Craig, Vice President, Middle Market Healthcare, Fifth Third Bank What me worry? There are two parts to the energy equation - energy generation and transportation. Only 0.6 percent of the nation’s oil consumption is used to generate energy and so I do not anticipate the oil spill having much impact on energy prices, even though the energy companies Pat Mulligan may use it as an excuse to inflate them. Also it will have little impact on shortterm oil prices because this was a new well so the output (or lack of it) cannot be attributed to current supply. The biggest financial cost of the Gulf spill is probably going to be a further increase in government spending and debt, to give the general public the perception that something is being done about the spill. This together with a massive hit to the retail and tourist trade in the affected areas will further increase the impending inflationary upward spiral. —Pat Mulligan, Group Chairman, Vistage International Energy investors will shift their focus because of the regulatory moratorium on deep water drilling. Those oil and gas producers who have more onshore or shallow water exploration will continue to be rewarded in the financial markets with better multiples relative to their peers more Greg Heinlein dependent on deep water drilling. Several large and balanced (on/offshore) domestic producers will look to acquire deep water drilling rights from majors, who will choose to move rigs and emphasis out of the Gulf of Mexico, with a longer term focus on re-establishing deep water drilling once the current administration is out of office. Companies poised to capitalize on these shifting 42 MERGERS & ACQUISITIONS September 2010
THE PULSE investment themes will look to acquire deep water Gulf of Mexico assets by non-exposed exploration companies. Because of the even greater focus on risk management resulting from the Horizon accident, exploration and service companies will take longer to develop new wells to ensure safe production results. This will cause greater upward pricing pressure for oil due to increasing global growth needs, generally slower development from U.S. production and declining production globally. Unfortunately, this will continue our reliance on foreign energy. As oil and oil derivative prices rise, America will continue to incentivize investments in alternative energy like solar, wind and others. —Greg Heinlein, Principal and Founder, Angel Investors LLC From my personal perspective having several transactions in the upstream services sector, deals are getting done. Although it is politically correct to talk about alternative energy (excluding natural gas), the reality is there are no serious alternatives to hydrocarbons for the foreseeable future, especially with the growth of the Asian economies. I believe that dealmaking in the energy sector, especially with regard to oil and gas will continue to be very active, but with an emphasis on production and MRO related opportunities, and less on drilling. The risks of drilling related businesses were borne out prior to the Deepwater Horizon incident when rig counts plummeted between 2008 and 2009 and many drilling related companies saw significant erosion in revenues and EBITDA. Those companies that were more focused on production and MRO saw much less erosion and were seen as more of a non-cyclical, safer play. The other trend that we are seeing , which again was occurring prior to the Deepwater Horizon incident, but which will now accelerate, will be land-based E&P plays, driven predominantly by the shale-rich regions in Texas (Barnett Shale, Eagle Ford Shale), Pennsylvania (Marcellus Shale) and North Dakota (Bakken Shale). While the Barnett and Marcellus Shales are natural gas driven and susceptible to lower natural gas prices (need to increase demand of natural gas for vehicle fuel and power plant fuel), the more interesting plays are the fluid or oil shales of Eagle Ford and Bakken, which Erik Rudolph are very hot right now and possess much less environmental and regulatory risk than the deepwater GOM plays. Upstream service companies exposed to these shale plays, especially with an eye on environmental, inspection or MRO type services, will be in strong demand among acquirers. —Erik Rudolph, Managing Director, Farlie, Turner & Co. The entire energy sector is demand driven primarily by developing nations like India and China. Supply will continue to play catch-up. Energy will continue to be profitable for the foreseeable future. There will be many attractive investment opportunities in the energy sector for PE firms. For the first time China consumed more energy from all sources (oil, gas, coal, nuclear, renewables) than the U.S. While per capita energy consumption in China and India is roughly 20 percent of that in the U.S., it is forecast to increase rapidly over the next decade – with more cars, central heating and better food driving demand. Energy is a global business with free flows of capital to develop supply where the most profitable investments can be made. The negative impact of the blowout will be specific to those companies doing a substantial portion of their business in the Gulf. A risk factor is direct exposure. There are dozens of PE firms who have portfolio companies with many more privately held firms providing goods and services in the Gulf area. Depending on customer and geographic concentration, the negative impact to these firms will be large – but for how long? Impossible to predict. —Bob Kosian, Managing Partner, The Capital Solutions Group On The Agenda September 1 Europe Chapter Leadership Meeting September 13 2010 Upper Midwest Capital Connection September 14 ACG Denver, Luncheon: Ray Schiavone, CEO, Quark September 16 ACG Boston, Fall Networking Night September 21 2010 ACG LA Business Conference September 28 ACG Board of Directors Meeting September 29 and 30 ACG Richmond, Virginia capital Day Conference September 30 ACG Atlanta, Wine Tasting and Reception September 2010 MERGERS & ACQUISITIONS 43
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September 2010 - Association for Corporate Growth

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