jefferies energy conference 2018 · 2018. 11. 30. · jefferies energy conference 2018 pete bowden,...

Jefferies Energy Conference 2018Pete Bowden, Managing Director & Global Head of Energy Investment Banking

November 2018

Jefferies LLC

The information provided in this document, including valuation discussions, represents the views of Jefferies Investment Banking. There is no assurance that the views expressed herein will be consistent with the views expressed by Jefferies Research or its Analysts. Nothing in this document should be understood as a promise or offer of favorable research coverage.

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Jefferies LLC November 2018/

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i


Key Themes in Oil and Gas M&A

2

4

3

Oil has declined rapidly over the past two months, leading to continued volatility and heightened skepticism in the public markets1

Upstream M&A activity remains historically low, but corporate consolidation has arrived…to mixed results

Midstream M&A activity is driven by PE focus on the Permian and other low breakeven plays, as well as MLP simplifications

Outlook for M&A in 2019 is uncertain and dependent on several important factors

1


Permian Basin – Key Driver of Global Supply 1

2


Despite Recent Commodity Price Volatility – Outlook for Oil Remains Strong

Source: ExxonMobil 2018 Outlook for Energy: A View to 2040.

Global Liquids Supply and Demand (MMBoe/d)

-

20

40

60

80

100

120

2015 2020 2025 2030 2035

Oil

& G

as L

iqui

ds (

MM

Boe

/d)

PDP Permian Growth Other Growth Demand

Incremental Permian Production:

Daily Production (MMBoe/d)

% Total Production

% of Growth Wedge

Growth Wedge to Meet World Demand

Current Producing Wells

2.5 8.5 14.4

3% 8% 13%

12% 16% 17%

12.2

11%

17%

3


Comparison of Global Oil Resource Plays

2 BBo

10 BBo

13 BBo

28 BBo

160 BBo

165 BBo

212 BBo

Thunder Horse(GoM)

Bakken Shale

Prudhoe Bay

Eagle Ford Shale

Ghawar (SaudiArabia)

Midland Basin

Delaware Basin(1)

(1)

Permian Basin is a World Class Oil Resource…

Total Permian Basin is 2.4x Ghawar

Source: Jefferies and Pioneer Natural Resources June 2015 Investor presentation.(1) Jefferies estimate.

Comparison of Net Recoverable Oil from Global Resource Plays

4


…With Unmatched Potential in North America…

3rd BS

U. WCB

Base 2nd BS

L. WCB

Cline

WCA

1st BS

2nd BS

Base 1st BS

Avalon

Delaware Basin

Horizontal Targets 10+

OOIP (MMBbl / section) ~940

Gross Thickness (ft) ~4,300’

Remaining Dev. Locations ~455,000+

Midland Basin

Horizontal Targets 10+



Remaining Dev. Locations ~247,000+

Eagle Ford + Bakken + Niobrara

Horizontal Targets ~10



Remaining Dev. Locations ~54,000

U. Spraberry

M. Spraberry

L. Spraberry

L Spr. Shale

Dean

Upper WCBLower WCB

WCD

Strawn

WCA

WCC

Austin Chalk

Upper EFLower EF

U. BakkenL.Bakken

Three Forks

Nio. Chalk BNio. Chalk C

Codell

Nio. Chalk A

LTM Permian Basin production growth is >800 MBbl/d, which is ~2x all other L48 basins combined

5


…And Has Withstood Commodity Price Volatility

(1) Source: Bloomberg as of November 21, 2018.(2) Source: Baker Hughes.

YTD – NYMEX Oil Price vs. Permian Rig Count

Permian Rig Count Up 29%

300

320

340

360

380

400

420

440

460

$50

$55

$60

$65

$70

$75

$80

Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18

Perm

ian Unconventional R

ig Count

Oil

Pri

ce (

$/B

bl)

U.S. Onshore Rigs NYMEX Spot Oil Price

6


Comparison of Global Oil Resource Plays

Permian Basin Currently Accounts for ~50% of Total Active Rigs…

Leverage < 3.0x

Enterprise Value > $10B

Production Growth>15%

Leverage <2.0x

Free Cash Flow

Total US Onshore Rig Count

Resource Plays (1)

Permian Basin

Top 10 Counties (2)

Top 5 Counties (3)

366 39%

439 47%

780 84%

929 100%

272 29%

(1) Includes the following: Permian, Cana Woodford, DJ Basin / Niobrara, Williston, Eagle Ford, Marcellus, Granite Wash, Haynesville, Utica, Mississippian, Ardmore Woodford, Barnett, and Arkoma Woodford.(2) Includes the following: Reeves, Midland, Lea, Martin, Eddy, Loving, Pecos, Howard, Ward, and Upton counties.(3) Includes the following: Reeves, Midland, Lea, Martin, and Eddy counties.

Identifying Drivers of Rig Activity

7


Mid

land

Cou

nty

Lea

Cou

nty

Mar

tin

Cou

nty

Edd

y C

ount

y

Ree

ves

Cou

nty

…& Activity is Heavily Concentrated in Only 5 Counties

Comparison of Global Oil Resource Plays Permian Basin Active Rigs

County Reeves Midland Lea Martin Eddy

Active Rigs 84 56 53 43 36

Active Operators 32 16 23 17 18

Acres (M) ~1,307 ~577 ~732 ~579 ~1,110

Horizons 4 6 9 6 8

Locations ~68,000 ~47,500 ~34,000 ~47,000 ~61,500

Years of Inventory (1) 45 46 35 60 94

(1) Assuming current rig activity levels.

8


Permian Basin Development Has Massive Implications for the Industry

Comparison of Global Oil Resource PlaysCapital Requirement for 20,000 Acre Development in Lea County

Drilling & Completions

20,000 gross acres

108 wells per section

10,000’ lateral length

$8 MM per well (average)

~1,700Total Wells >$13 Bn

Impact on Ancillary Services

Water

2-rig program

100 wells brought online in 48 months

Water / Oil Ratio: 4.0x

Cost: $ / Bw: $1.00

~200 MM Barrels of Water in 48 Months

>$200 MMDuring Initial Development

Sand Proppant load: 2,000 lbs / ft

Cost: $ / Ton: $30.00 – $35.00

~17 MMTons of Sand

>$500 MMTo Complete

All Wells

Compression

Compressor capacity: 6 MMcf/d

Peak development requirement:

─ 15 compressors ($1.4 MM each)

─ 4 compression stations ($1.7 MM each)

~250 MMcf/dat Peak

Production

>$100 MMTo Install

Compression

9


Comparison of Global Oil Resource PlaysXOM Tight Oil Production (1)

Industry Example – ExxonMobil Growth Plan

(1) XOM analyst day presentation in March 2018.(2) Midland and Delaware Basin only.

Ramping Permian Production to 600 MBoe/d

by 2025 (2)

XOM upstream acquisitions in the

Permian since 2017:$7 Bn

Infrastructure investment to bring oil

and feedstocks to market:

$2 Bn

Commitment to build chemical, refining, lubricant and LNG facilities along the U.S. Gulf coast:

$20 Bn

10


Decline in Equity Valuations Has Reduced M&A Activity2

11


Equities No Longer Correlated to Commodity…

Correlation in Equity Performance vs. Oil Price

(61)%

38%

(14)%

(70)%

87%

(27)%

(72)%

164%

(34)%

-100%

-50%

0%

50%

100%

150%

200%

7/25/14 - 2/11/16 2/11/16 - 10/3/18 10/3/18 - 11/23/18

Alerian MLP Index S&P E&P Index NYMEX Spot Oil Price

12


13.4x

9.7x

8.6x

10.1x

7.2x

6.0x6.6x

4.8x4.5x

Large Permian Pure Play Other Permian All Remaining Independents

…And E&P Equity Valuations Have Decreased Meaningfully

Note: Large Permian Pure Play include EOG, CDEV, CXO, FANG, PE, and PXD. Other Permian companies include APC, APA, AREX, CPE, XEC, ECA, EPE, HK, JAG, LPI, LLEX, MTDR, NBL, OXY, REN, REI, ROSE, SM and WPX.Source: Company filings and Capital IQ as of November 23, 2018. Capital IQ for historical data.

TEV / Forward EBITDAas of November-2017



6 Companies: EOG, CDEV, CXO, FANG, PE, and PXD

(30% of Total)

Large Permian Pure Play

22 Companies(36% of Total)

Other Permian

70+ Companies(34% of Total)

All Remaining Independents

2016 2017 2018 2016 2017 2018 2016 2017 2018

TEV / NTM EBITDA

13


Valuations Waterfall

Company Count (1)Average

TEV / 2018Adjusted EBITDA

AverageTEV / 2019

Adjusted EBITDA

55 5.9x 4.6x

46 5.9x 4.7x

21 6.5x 5.4x

7 7.8x 5.6x

7 7.8x 5.6x

6 7.9x 5.7x

Investors Focused on Several Drivers of Premium Valuations…

Key Valuation Drivers

Note: Market data as of November 23, 2018.(1) Select publicly traded U.S. E&P companies.(2) 2018-2019 estimated growth per Wall Street research.(3) EBITDA less Capex.

Leverage < 3.0x

Enterprise Value > $10B

Production Growth>15%

Leverage <2.0x

Free Cash Flow

Select E&Ps

LQA Leverage < 4.0x

Enterprise Value > $7.5Bn

2018-2019 Production Growth>20.0% (2)

2018E Leverage <3.0x

Free Cash Flow (3)

SCALE

GROWTH

LOW LEVERAGE

FCF GENERATION

Premium for:

14


Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Stock Price Performance (69%) (45%) (36%) (36%) (32%) (32%) (32%) (30%) (29%) (28%) (28%) (23%) (21%) (21%) (20%) (18%) (16%) (15%) (13%) (13%) (13%) (11%) (10%) (8%) (7%) (6%) (6%) 6% 12% 15%

Distributions (% Mkt Cap) 14% 3% 0% 17% 0% 0% 0% 0% 0% 0% 0% 0% 3% 2% 0% 0% 0% 0% 1% 0% 0% 6% 3% 1% 0% 10% 5% 0% 8% 4%

Executed Buyback P P P P O O O O O O O P P O O P P P O O P O P O P P P O P P

…And No Equity Performance Correlation to Stock Buybacks / Dividends

Total Distributions to Shareholders vs. Share Price Performance

Note: Stock price performance since January 1, 2017.

R² = 0.0274

(75%)

(55%)

(35%)

(15%)

5%

25%

0% 3% 6% 9% 12% 15% 18%

Sto

ck P

rice

Per

form

ance

%

2018 YTD Distributions as % of Market Cap

15


$25

$20

$12 $11

$22

$9

$32

$21

$-

$5

$10

$15

$20

$25

$30

Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Asset Corporate

Transactions 71 58 58 53 69 57 50 18

BP / BHP: $10.5 Bn

FANG / EGN: $9.2 Bn

CXO / RSPP: $9.5 Bn

Deal Activity Troughed in Q2 2018 And Appears To Be Rebounding…

(1) Source: PLS as of November 23, 2018. Includes deals with disclosed value greater than $5 MM.

Q4 2018 YTD

U.S. E&P Deal Volume ($Bn) (1)

ECA / NFX: $7.7 BnCHK / WRD: $4.0 BnDNR / PVAC: $1.7 BnXEC / REN : $1.6 Bn

16


10 10

6

5

3 3

2

Non-Core Clean Up Core Bolt-on Scale Builder Royalties PDP Non-Op GoM

…With Dealmakers Executing on Multiple Strategies

(1) Source: PLS as of November 23, 2018. Includes deals with disclosed value greater than $150 MM.

Last 6 Months U.S. E&P Deal Count (1)

Transaction Value $16 Bn $7 Bn $24 Bn $2 Bn $3 Bn $1 Bn $2 Bn

Includes: CPE/XEC, FANG/Ajax, ESTE/Sabalo,FANG/ExL

Includes: Vantage/QEP, BP/BHP, Encino/CHK,Aethon/QEP

Includes: FANG/EGN, CHK/WRD, ECA/NFX, DNR/PVAC, ECR/BRMR

17


Why Have a Positive E&P M&A Outlook?

Permian Basin is a Non-Optional Resource for Majors / Large Independents

─NAV models demonstrate we are in the early innings of understanding and appraising value

─There will be logistics challenges and periodic pressure on differentials

─Significant interest in strategic bolt-ons and corporate activity

Corporate Consolidation Will Continue

─Corporate M&A effected for deleveraging will be received as primary equity issuance

─Public investors want fewer choices – capital migrating to fewer names and companies are striving to stay relevant

─ In a challenging / volatile commodity price environment, cost efficiency will be paramount

─Public investors are focused on pure play options

Non-Core Assets Will Continue To Be Monetized

─Substantial depth in inventory

─Certain assets can be “company-makers” in size and scale

─Acquisition metrics can be highly attractive for investors of private capital

1

2

3

18


Why Have a Positive E&P M&A Outlook? (Cont’d)

Private Capital Will Be Increasingly Important

─ Increased structured capital to accelerate drilling

─ Private capital wrappers for mature production / PDP

─ Public M&A may entail private capital participation to generate a portion of purchase price

Other Potential M&A Catalysts Are Emerging

─ Royalties: step-change in valuation driven by rapidly increasing rate and cash flow

─ PDP Assets: asset class is large, well understood and can generate attractive returns – a buyer set will emerge to take advantage of market dislocation

4

5

19


Challenging Environment for Midstream…But Valuations Remain Strong3

20


Alerian MLP Index Performance Since January 2017

Total MLP Product Inflows (Outflows) Since January 2017

(30%)

(25%)

(20%)

(15%)

(10%)

(5%)

--

5%

10%

15%

Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18

Public Market Environment for Midstream Remains Challenged

Source: Capital IQ and Wall Street Research.

(22%)

Lack of Capital Inflows to MLP-Focused Closed-End Funds has Led to Negative Public Market Performance Despite Improved Earnings and Stronger Balance Sheets

$(800)

$(400)

$-

$400

$800

$1,200

Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18

21


Performance Since Earnings Announcement

$24

$25

$26

$27

$28

10/30/18 11/6/18 11/13/18 11/20/18


$40

$45

$50

$55

11/7/18 11/14/18 11/21/18

“Robust volumes across our integrated midstream system, from the producing regions to end user and international demand, led to 16 operational and financial records during the quarter. Each of our reporting segments reported increases in gross operating margin compared to the third quarter of 2017. The NGL business segment reported record volumes for pipelines, marine export terminals, fractionation, and fee-based processing. Our crude oil pipelines and propylene business reported near record volumes.”

Q3 2018 Earnings Call, October 2018

“ONEOK's operating income and adjusted EBITDA increased 40 and 26 percent, respectively, compared with the third quarter 2017. Higher results were driven primarily by natural gas and NGL volume growth in the Williston Basin and STACK and SCOOP areas and increased optimization and marketing activities in the natural gas liquids segment with a 18 percent increase in NGL volumes gathered and a 15 percent increase in natural gas volumes processed, compared with the third quarter 2017.”

Q3 2018 Earnings Call, October 2018

Record Earnings Have Been Met with a Yawn

“This is the strongest quarter in Targa’s history across multiple operational and financial dimensions, positioning us to exceed our full year 2018 financial guidance and providing Targa with positive momentum heading into 2019. With continued attractive business fundamentals, strong execution and multiple growth projects on-track to begin operations over the near term, Targa’s longer-term growth outlook continues to strengthen.”

Q3 2018 Earnings Call, November 2018


Despite Record Volumes and Financial Results Midstream Equities have Traded Negatively Post Q3 2018 Earnings Announcements

(1.9%)

(6.6%)

(16.2%)

$58

$60

$62

$64

$66

10/30/18 11/6/18 11/13/18 11/20/18

22


Asset Level Midstream and Storage Transactions over $50 MM ($Bn)

High-Growth Midstream M&A Activity Remains Robust

Despite a challenging equity market environment, overall asset-level M&A in the midstream sector has remained robust, driven primarily by financial buyers pursuing high-growth assets, supported by

attractive debt financing options

Source: PLS

Key Points

Despite the challenges facing public midstream entities, the asset-level M&A market has remained strong, driven largely by acquisitions involving large, capital-rich private equity buyers

2017 activity was above levels seen in all recent periods

2018 has also been a strong year for high-growth midstream asset sales─ Riverstone and Goldman

Sachs / Lucid ($1.6 Bn)─ Morgan Stanley

Infrastructure / Brazos ($1.75 Bn)

─ Discovery Midstream ($1.2 Bn)

─ Eagle Claw / Caprock ($950 MM)

─ Velocity Midstream ($442 MM)

Non-Core Asset Sales

Average 2018 Transaction Multiple: ~11.7x

High-Growth Asset Sales

Average 2018 Transaction Multiple: ~14.7x

$5.0 $4.4 $5.7

$9.6 $10.3

$6.8 $6.6

$1.4

$7.5 $6.4

$11.8 $11.0

$7.1

$17.2 $16.7

2014 2015 2016 2017 2018 YTD

High-Growth Assets Non-Core Assets

23


$10.7 $9.9 $6.3

$9.5

$3.9

$1.1 $1.2

$0.8

$7.6

$12.8

$11.8 $11.0

$7.1

$17.2 $16.7

2014 2015 2016 2017 2018 YTDStrategic Buyer Non-Strategic Buyer

Asset-Level Midstream Transactions by Buyer Type ($Bn)

Asset-Level Midstream Transactions by Basin ($Bn)

Shifting Dynamics in Asset-Level Midstream M&A

Source: Capital IQ, PLS and public filings.

In 2014 and 2015, Strategics accounted for ~90% of total transaction value

Year to date, private capital accounts for ~77% of total

transaction value

HOFTCO & Navigator

In 2017, ~38% of Strategicstransaction value came from

two deals

Permian has become the target area for asset-level transactions

65.0%76.6% 84.1%

50.6%32.5%

33.6% 9.3%12.3%

41.3%57.9%

1.4%14.1% 4.5% 2.6%

3.6% 3.6% 7.0%

2014 2015 2016 2017 2018 YTDOther Permian SCOOP/STACK/Merge DJ Basin

24


24.0x

22.5x

21.0x19.8x

13.4x14.2x

10.7x

15.1x

17.1x

8.3x

14.3x

Transaction Valuations Are Relatively Strong

The average next-twelve-month EBITDA multiple across recent asset transactions is 16.4x(1)

Seven out of the last nine transaction have included financial buyers

Financial buyers have purchased seven of the last eight announced transactions

Asset

Transaction EBITDA Multiple

(1)Permian Asset Non-Permian Asset

9.0x

(1) Assumes 100% of earn-outs are achieved.

25


Current Median Coverage

Median Yield Comparison

2018E Median Debt / EBITDA

MLPs Re-Positioning Financial Metrics

MLPs have successfully reduced leverage to levels at,

or below, market-accepted leverage of 3.5x – 4.0x forward

EBITDA

Coverage levels at many MLPs fell below

1.0x in 2015 and 2016

MLPs have taken significant steps since 2016 to reposition themselves – core strategies have included prioritizing capex budgets, adopting more conservative distribution policies, taking a disciplined approach to acquisitions, selling non-core assets and effecting financial restructurings

While still not trading at the levels seen in 2014, public midstream company valuations have improved significantly from 2016 lows and financial flexibility across the sector has been enhanced

3.4% 5.1%

3.8% 4.9%

15.0%

9.3%

19.8%

8.1% 5.6%

9.8% 8.5% 8.5%

Large Cap Median Crude and Refined Products G&P Regulated Pipelines

8/29/2014 Median Yield (AMZ High) 2/11/2016 Median Yield (AMZ Low) Current Median Yield

4.2x

3.9x

3.7x

4.1xMedian: 4.01x

Large Cap Crude and Refined Products G&P Regulated Pipelines

1.5x

1.0x 1.1x

1.5xMedian: 1.29x

Large Cap Crude and Refined Products G&P Regulated Pipelines

26


Key Points

Mature MLPs that have reached the 50% splits are finding that the IDR drag on distributable cash flow has resulted in a non-competitive equity cost of capital

The consolidation of affiliated MLPs has been an accelerating trend in the midstream sector over the last few years

Over the last three years, there have been ~20 affiliated MLP consolidations

Jefferies expects the trend of MLPs simplifying their structures through IDR eliminations and affiliate consolidations to continue through the rest of 2018 and into 2019

Affiliated Consolidations

MLP Sector Experiencing a Significant Restructuring Since Mid-2016

Completed GP / IDR Eliminations Potential Candidates for Simplification

27


Concluding Thoughts4

28


Concluding Thoughts

Volatility Can Generate Opportunity

Private Capital is Uniquely Positioned to Benefit from Market Dislocation

The Public Capital Markets Will Return… But When?

Gas/NGL Production Associated with Oil Drilling Will Come to Dominate the Gas/NGL Markets

Commodity Consumption Will Become Increasingly International

Small and Mid-Cap Public Companies Will Continue to Face Real Challenges

Eventual Consolidation is Inevitable

1

2

3

4

5

6

7

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