Today and tomorrow, I'll have the privilege of attending Hart Energy's 2014 Executive Oil Conference in Midland, Texas. To say this is a timely conference would be a massive understatement.
The drop in oil futures from $110 per barrel in June to the high-$70s today is the hottest topic in finance. Much to my amazement, however, the market seems to have forgotten (again) that oil and gas exploration and production companies are price-takers.
So, the biggest question is: How much will the lower prevailing oil price cause E&P companies to reduce capital expenditures in 2015? One of the best firms to answer this question is scheduled for the conference's keynote address Tuesday morning: American Energy Partners.
After his exit from Chesapeake Energy (CHK), Aubrey McClendon made a smashing re-entry into the oil and gas world with the creation of American Energy Partners, L.P. So far in 2014, the firm has raised $14 billion from private equity sponsors and high-yield investors. McClendon and his team certainly wasted no time in putting those dollars to work with massive acreage purchases in the Utica basin in Ohio and the Permian basin in Texas, and with aggressive investments in midstream assets.
As any Friday Night Lights fan knows, Midland is in the heart of the Permian basin. So I am anxious to hear American Energy Partner's views on the economic viability of the Permian play assuming $78 oil continues to prevail. Three questions jump to mind:
- Will American Energy Partners continue to aggressively drill on acreage that was so aggressively leased?
- Will lower service costs adequately offset the lower realized price per barrel (i.e., what is the net impact of the lower oil price on American Energy Partners' cash flows?
- Will American Energy Partners start looking at acquiring entire public companies -- as opposed to just acquiring acreage -- as the stock market's "oil price panic" has sent many of the smaller E&Ps to valuations that are tiny fractions of true net asset value?
Obviously, these conferences are booked well in advance, so the tenor of several panels will have changed since the agenda has been set. For instance, the "IPO Fever in The Permian" presentation probably should have a different name now. Although recent midstream IPOs (Shell (RDS.A) and Antero (AR) have spun off their pipelines to great market response in the past month) have performed well, any asset owner expecting to IPO an E&P asset would have to be fully delusional with asset values at current levels.
So, Steve Gray, CEO of RSP Permian (RSPP), the product of a massive IPO in January sponsored by private equity giant Natural Gas Partners, LLC, should give an intriguing presentation. If the capital markets work as they should, private equity firms should be gobbling up assets now, in hopes that the market will someday return to valuing E&P companies at the lofty levels seen this past spring. Yes, it's notable that the market for producing assets has gone from a seller's market to a buyer's market in six months, but buy-low/sell-high works in any environment.
Finally, at any conference my goal is to generate read-throughs. I hope to gain valuable information on companies we own at Portfolio Guru, LLC by attending presentations of companies that have similar business models. In this case, Concho Resources' (CXO) executive V-P Will Giraud will be presenting, which will be invaluable for learning about business at Portfolio Guru core holding Arabella Exploration (AXLWF), whose land holdings are adjacent to Concho's in the Southern Delaware basin.
In addition, the Oil & Water Mix panel will feature a senior executive from Select Energy Services, a direct comparable to Portfolio Guru favorite HII Technologies (HIIT).
Management from two other portfolio holdings, Torchlight Energy (TRCH) and Victory Energy (VYEY), will, along with HIIT management, be attending the conference, but not presenting. I certainly look forward to catching up with them this week, as well.
