BoyarMiller Energy eBook 2013 State of the Industry

EnErgy2013 State of the Industry

Chairman’s Letter

To Our Readers,

At BoyarMiller, when we partner with clients, we work as

a strategic part of their business team, and that means

we have to be experienced in more than just law. We also

need to understand their industry so that we are able to work

collaboratively with them and add value to their business.

That’s why we bring together the top insights into industry trends

and best practices, and deliver it to you. Not only has this infor-

mation been invaluable to us and to our clients, but we hope

it will be beneficial to you as well.

The information in this publication has been gathered from

industry-leading clients we have partnered with and from our

own energy team. If you find value in it and would like to hear

more, join us for our next BoyarMiller Breakfast Forum.

Sincerely,

Chris Hanslik

Firm Chairman

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Table of conTenTs

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Your strategic partner should be an expert in your industry, not just law.At BoyarMiller, we’re committed to providing insightful, versatile expertise to organizations

of all sizes as we guide them through complex business issues. We know that in order

to understand how best to collaborate with you, we need to know your industry and

your business.

To this end, we gathered the best insights into energy trends and best practices from

industry-leading clients we have partnered with and from our own energy team. It’s our

hope that the information we’ve accumulated through years of collaborative work in the

energy industry will be beneficial for you.

InTroducTIon

Your strategic partner requires knowledge of trends, industry and law.

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The U.S. manufacturing industry is competing globally again, thanks to lower nat-ural gas prices and a renaissance in the oil and gas energy sector, according to pan-elists at BoyarMiller’s “Perspectives on the Energy Industry” forum. But, while more investors are injecting capital into the industry, the lack of sensible long-term energy policy and fragile global economies continue to have an impact on investor confidence.

natural gas ProduCtionU.S. natural gas production has increased to more

than 70 bcf/d, even as rig count drops – a sign that

plays are prolific and that producers are becoming

better and more efficient at what they do. Cheap,

plentiful supply has created energy near-indepen-

dence in the natural gas realm. The market has responded by retiring coal plants in

favor of cheaper coal-fired power generation; by building chemical plants and fertilizer

projects; and with discussion of converting the transportation fleet to natural gas.

CrudE oil ProduCtionReversing a 40-year decline in crude production,

the U.S. has been responsible for nearly all of the net

growth in non-OPEC oil supply. Onshore production

has grown from 3 million to 5 million barrels a day over

the last two years. Because of this increased produc-

tion and the supply of crude from Canada being transported to the Gulf Coast, crude

prices are low. Producers are, to an extent, suffering from their own success. However,

those that transport and refine the oil are now at an economic advantage.

Job growtHOil and gas and supporting industries directly provide

more than 500,000 jobs. Analysts project that number

could double or triple in the coming years as production

in the U.S. continues to increase. The low energy costs

give U.S. manufacturing a competitive advantage,

especially in industries that use oil and gas as direct feedstock.

The growth of these industries will provide millions more jobs.

sTaTe of The IndusTrY

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500,000 oIl and gas jobs

5 mIllIon barrels per daY

70 bIllIon cubIc feeT per daY

Regulatory & Political EnvironmentwHat sEts Houston aPart?Houston refineries benefit from the cheap, plentiful crude oil resources being produced

and transported to our area. Companies are able to buy crude at low prices and export

refined product for a significant profit. This benefits the local Houston economy as a whole,

beyond those within the industry.

2013 rEgulatory trEndsDavid Pursell, Managing Director & Head of Securities, Tudor, Pickering, Holt & Co.

• Keystone PiPeline or not, Canadian oil will be transPorted: Canadian crude oil is

coming to the Gulf Coast. The options for transportation are repair, connect and reverse

existing pipes; transport on rail cars; or build a new pipeline. The best option with the

least risk is the Keystone Pipeline.

• Co2 emissions are down, and everyone is Claiming it: CO2 emissions hit a twenty-

year low in 2012 as a result of cheaper natural gas replacing coal in power generation.

Although this meets environmentalist goals of lower emissions, it does not satisfy the

political push toward solar and wind energy.

• government-mandated ethanol sales will drive gasoline PriCes uP: Because companies

are faced with lower demand for gasoline and higher mandated ethanol sale levels, they

are forced to buy credits or export gasoline without ethanol to avoid blending more than

10% ethanol into gasoline pools. The combination will continue to drive gasoline prices up.

• high Crude ProduCtion risKs u.s. disConneCting from global PriCes: U.S. onshore

production has increased by 2 million barrels a day over the last two years because of

technology and more efficient processes. Because crude cannot be exported, it will build

up on the Gulf Coast, potentially disconnecting low U.S. prices from the global pricing.

experT InsIghT

as managing director and head of securities, david Pursell is responsible for tPh’s analysis of global oil & gas markets, including inventory and price forecasts, supply/demand modeling and rig count/production relation-ships. he is a board member of private energy companies oxane materi-als and unconventional gas resources. he holds a bs and ms in Petroleum engineering from texas a&m university.

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Capital MarketswHat sEts Houston aPart?Houston’s energy capital market has grown increasingly competitive over the past several

years as investment firms try to take advantage of the better economic climate in the

Houston area and capture a piece of the energy market. Low natural gas prices are

particularly beneficial to Houston because of its ship channel.

2013 CaPital marKets trendsTom Hargrove, Managing Director, GulfStar Group

• PiPeline serviCe ComPanies are in a great Position In addition to the stable, recurring revenues from testing and maintenance work to

keep more than 25,000 pipelines across the country meeting the demands of stricter

regulations, new pipeline structure must be constructed to support growing production

in unconventional gas plays.

• low natural gas PriCes benefit PetroChemiCal ComPanies Dow chemical estimates $95 billion in petrochemical plants are on the drawing board.

While not all will be built, the low natural gas prices are driving significant construction

and economic activity. This will benefit Houston and the Gulf Coast financially.

• middle marKet m&a aCtivity is on the rise Driven by public companies whose stock prices are at attractive levels and cash

balances are high, M&A activity is on the rise because of the large universe of private

equity buyers with liquidity.

• lenders are inCreasingly aggressive Lenders have become relatively aggressive because the energy market is an area where

they can actually make money, instead of lending it at low rates over LIBOR. In addition,

cash flow-based lending is making a return.

tom hargrove is a co-founder of gulfstar group and has more than 30 years of investment banking experience. Prior to gulfstar’s formation, he served as a senior vice President of rotan mosle inc. tom is a director of Commercial alliance insurance Company and rimCo royalty Partners. he holds a ba in economics from the university of texas.

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Private Equity InvestingwHat sEts Houston aPart?The energy industry is very large and capital-intensive, and as the national economy

recovers and energy production hits record highs, there are many opportunities within the

industry to put money to work. That makes it an exciting time for business, and it’s great for

Houston, for Texas and for the U.S.

2013 Private equity investing trendsJames Wallis, Vice President, Lime Rock Partners

• investors feel ComPelled to Play the marKet – and that’s dangerous People are looking for places to put money, as they know idle cash is a guaranteed

negative return. The problem with people stepping further and further out on the risk

curve, looking for yield, is that timing the markets is incredibly difficult. Now is not the

time for big, bold, market-calling bets. Diversify and proceed with caution.

• “new” teChnologies are evolutionary, not revolutionary Hydraulic fracturing dates back to 1947. Newer techniques such as simultaneous fractur-

ing, “zipper fracs,” real-time microseismic, nano-scale reservoir analysis, advanced

fracturing fluids, geosteering and more have simply made producers better and more

efficient at what they do.

• the u.s. natural gas Cost Curve has been uPended It is now cheaper to develop “bad” reservoirs than the “good” reservoirs. Huge, prolific

and highly profitable unconventional plays are profitable at $4.50 or $5 per Mcf, whereas

conventional gas strategies require $6 or $7 per Mcf to be profitable.

• u.s. unConventional strategies will oPen uP “bad roCK” elsewhere The technologies and techniques that have opened up U.S. resources will be exported

around the world, giving places like Russia and Saudi Arabia a chance to go beyond

their substantial conventional production. It will open up a tremendous amount of supply

to the world.

James wallis joined the lime rock Partners team in 2007 and is presently a vice President in the houston office. since joining lime rock partners, he has primarily focused on e&P and energy service opportunities in the oil and gas sectors of north and south america. James currently serves on the board of directors of artificial lift Company, braden exploration ii, endur-ance resources and PdC mountaineer. he is also particularly involved in lime rock Partners’ investments in augustus energy Partners, vantage energy, and Xtreme drilling and Coil services. he holds a bba from the business honors Program at the university of texas.

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Current State of the Capital MarketsBy BoyarMiller’s Bill Boyar and GulfStar Group’s Cliff Atherton

With the ink on the 2012 election returns now dry, many people are questioning what

will be the impact of President Barack Obama’s reelection and unchanged control of

the Senate and House of Representatives on the energy industry capital markets. What

lies ahead in the public capital markets for private equity and M&A? What can we expect

from the providers of senior and mezzanine debt?

PubliC CaPital marKetsThe public capital markets have not been favorable for the large-cap diversified energy

companies, and with the continuation of current policies, there is not much reason for

optimism. A trend that can be expected to continue is limited availability of capital in

the public market for energy companies other than midstream MLPs.

Private equityThe substantial overhang of uninvested private equity commitments has driven substantial

private equity activity and will likely continue to do so. It appears as though 2013 will

continue to be an attractive time to sell or recapitalize middle market companies by

accessing private equity.

m&aFalling rig count, slight decline in oil prices and continued softness in natural gas prices

are causing a slowdown in E&P activity. The recent surge of drilling activity in areas where

there is no transportation infrastructure has redirected investment activity to midstream –

in fact, 55% of all M&A deals in second quarter last year were midstream deals.

senior and mezzanine debtThe availability of senior and mezzanine debt continues to be the key driver of overall

transaction activity, and is particularly crucial for valuations in middle-market deals.

Senior lenders are managing regulatory pressure and tight credit requirements.

In conclusion, while public markets are likely to be weak, private equity firms will continue

to look for companies and management teams to support. The M&A markets can be

expected to be strong, and debt markets will remain open but be characterized by

conservative underwriting and regulatory pressure.

for more detailed information about the state of CaPital marKets, rEad the full article.

Chris Hanslik Firm Chairman

Represents companies in all aspects of the energy sector, both

domestically and internationally, in disputes ranging from breach

of contract and fraud to misappropriation of trade secrets and

employment related disputes. Has secured favorable results in

both state and federal courts, as well as international arbitration

proceedings for energy clients.

Gary Miller Chairman, Business Group

Represents numerous domestic and offshore-based companies

in connection with acquisitions and divestitures, financings, joint

ventures and general corporate matters in the United States.

Bill Boyar Shareholder, Business Group

Represents the various parties involved in the acquisition, disposition,

capitalization and financing of national and international busi-

nesses. Served as lead counsel for numerous complex, multi-party

acquisitions and project financings with significant experience in

corporate finance, mergers and acquisitions, private equity and

structured finance.

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energY pracTIce leaders

Steve Kesten Shareholder, Business Group

Represents multiple international energy and energy services cli-

ents with outbound expansion (i.e., U.S. companies expanding

internationally) and inbound expansion (international companies

expanding to the U.S.), including start up expansion or expansion

by acquisition, as well as in connection with financing and merger

and divestiture transactions.

Gus Bourgeois Shareholder, Business Group

Represents clients doing business domestically and internationally

in connection with mergers and acquisitions, customer and vendor

contracts - including master services agreements - technology

licensing, employment agreements and related matters.

Craig Dillard Shareholder, Litigation Group

Handles litigation in both state and federal courts, as well as on

appeal, for both domestic and international oil and gas clients who

have been sued in the United States or in arbitration. Specializes

in litigation of commercial contracts, including indemnity obliga-

tions; technology protection, including trademark infringement

claims, trade secret misappropriation claims and intellectual

property disputes; and, enforcement of oil and gas companies’

non-compete, confidentiality and other employment agreements.

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