In this week’s “My Career in Energy” interview, we’re featuring our very own Mike Mroz.
Based out of the Denver area, Mike has been with Enverus since our days as Drillinginfo. He joined our team in 2013 through our acquisition of Transform Software & Services Inc. as a territory sales manager. Today, Mike is our senior vice president of Energy Analytics Sales, where he helps his team, and Enverus, grow and stay at the forefront of technology and innovation.
Now without further ado, let’s take a look at Mike’s career in energy.
What was your first job in energy and how did you get it?
It all started back in 1998. My first job in the industry was in seismic acquisition at Digicon Geophysical. I was at a college career fair and interviewed with them. I really liked the idea of working six weeks on and six weeks off, right out of school. It was a fun job, the six weeks off were great but spending six weeks at a time away from family and friends was hard. It’s an amazing thing to see what goes on 24/7, 365 days a week in the energy industry.
Tell us about your current role?
I lead Enverus’ Corporate, Specialty Verticals and Trading & Risk Sales teams. It’s a great career, having the ability to interact with so many different customers in different sub industries of the energy space. Our teams are made of such a diverse set of knowledge and abilities — it’s really fun to work with a team like this.
Who is your inspiration at work?
My inspiration at work are my people and doing everything I can to make them as successful as possible.
What is the first thing you do when you start work in the morning? Check my calendar, though, I often do that the night before to get a head start. I feel it’s important to have your day planned out and know what needs to be accomplished each day.
How do you relax? I’m in sales — that’s funny!
What was your favorite school subject and why? Math has always been my favorite subject. I just love numbers and putting them together and solving analytical problems.
What advice would you give someone entering the energy industry today?
Be an early adopter of every technology you can get your hands on.
What do you think the energy industry will look like in 10 years’ time?
It’s time for technology to take over. We’ve heard about the “great shift change” for a long time and it just hasn’t come. But it’s about to.
Want to connect with Mike? You can find his LinkedIn here.
Interested in sharing your career in energy or contributing to the “Enverus Innovator” blog? Fill out the form here.
Cold flow heavy oil (CFHO), as the name makes clear, describes the production of thick crude that flows slowly — think of molasses. Unlike some oil sands projects where steam is injected underground to decrease viscosity and allow the oil to flow, CFHO is pumped to surface without the addition of steam. CFHO typically relies on multiple horizontal laterals to increase reservoir contact. We subdivide CFHO production in Alberta into three sub-plays: Clearwater, Peace River and Lloydminster.
Many CFHO operators drill multiple horizontal segments off the same vertical wellbore, with some exceeding 15 legs. However, the provincial energy regulator’s documentation system does not allow for more than nine laterals per well, creating a significant data deficiency when analyzing the play. To combat this problem, Enverus digitized thousands of additional multi-laterals to create a more complete dataset. The newly captured additional legs (Figure 1) drastically impact well costs and lateral length-normalized production, important benchmarks in assessing economics. We estimate oil recoveries, after normalizing for lateral length, for the three sub-plays averaged a 36% decrease for wells with more than nine legs. Enverus clients now have access to the first complete dataset of multi-leg laterals, allowing increased accuracy in analysis.
FIGURE 1 | Multi-Leg Laterals Digitized by Enverus
If joint interest billing (JIB) processing feels like a cement block pulling you under, take heart. You are not alone. For most companies, JIB processing is plagued by multiple inefficiencies, conflicting sources of truth, complicated audit controls and high overall administrative costs.
Red Wolf Natural Resources, an E&P company based in Oklahoma City that invests in operated and non-operated assets, looked to solve this pain point. On average, the company processed 30-40 JIBs per month, requiring at least 30 approvals. They used EnergyLink to download 35-40% of the total amount of JIB data they received.
The approval process involved significant manual data entry, with the entire JIB process from receipt to approval taking five to six weeks. The size and complexity of the JIBs made it difficult to thoroughly review and analyze non-operated costs. The team — Austin Wentroth, controller; Jessica Mayo, administrative assistant; and Marshall Hall, petroleum engineer — was over it.
“When a downturn hits, every operator should analyze their non-op assets closely to manage costs. But when you receive a JIB from a large operator that’s 300 pages, there is no way to review this in detail with the way we were doing it. This was a major bottleneck for our company.”
-Marshall Hall, Petroleum Engineer
JIBFlow — a better way
Wentroth learned about JIBFlow by Enverus at the 2020 virtual SPARK Conference, an annual Enverus conference focused on the latest in industry digital transformation technology and trends. JIBFlow integrates EnergyLink with OpenInvoice so an accountant can send a JIB invoice from EnergyLink to OpenInvoice for approval via a seamless connection. With one click, you send the JIB invoice to OpenInvoice! This makes OpenInvoice a single source for all invoice approvals.
JIB invoices can be processed using the same automation capabilities operators use for invoices, including automatic routing, automated code verification, and automatic approval of low-value invoices. Wentroth knew Red Wolf could save time and effort spent processing JIB invoices, consolidate its data and simplify the review process with the JIBFlow upgrade.
“If there is a button where you can automatically transfer the data to OpenInvoice faster — why wouldn’t you do it? We are a lean enough organization that the cost-benefit is to automate the process so we can do more valuable work overall.”
-Austin Wentroth, Controller
After JIBFlow was integrated and the coding and wells were entered into EnergyLink, the first JIB Red Wolf received was significantly better. They could now send JIB details to OpenInvoice for detailed analysis. Auto-coding in OpenInvoice dramatically reduced the team’s manual input.
For Red Wolf, the benefits of EnergyLink and OpenInvoice go beyond simplifying the JIB review and approval process. With detailed coding, the company categorizes costs into different categories for analysis. This data allows Red Wolf to find potential savings opportunities in their non-operated expenses, a task that is traditionally challenging to do for many operators.
“When you have the power of knowing what you are being charged at a detailed level, you can lower your costs in an area where traditionally people think you can’t,” Hall said.
Read the interactive case study below to learn more details about Red Wolf’s success with JIBFlow, including details on how their petroleum engineer leverages the company’s non-operated spend details to forecast capital expenses and uncover potential cost savings on non-op spend.
Lenders have and continue to price credit risk within the E&P industry by assessing the proportion of a borrower’s cash flow and collateral to its net debt. However, in recent years many lending institutions began adopting policies to incorporate environmental, social and governance (ESG) factors into their investment decisions to assess risks unquantified by traditional metrics. Until very recently it’s been difficult to observe the impact of ESG scores or rankings on the market prices of securities, but our analysis below suggests this may no longer be true.
To identify if there is a relationship between recent E&P bond yields and our proprietary ESG scores, we created two figures. Figure 1 compares E&P bond yields to our estimates of 2021 net debt to EBITDA (earnings before interest, taxes, depreciation and amortization). We expect and observe a positive correlation with bond yields and net debt to EBITDA, which means the more capital a company borrows the higher the interest it must pay on incremental debt, all else equal. Figure 2 plots the residuals of this function against our ESG scores, where a higher ESG score suggests the borrower carries less ESG related investment risk. The observed negative correlation between the residuals and ESG score implies market participants are now rewarding strong ESG performers with a lower cost of debt capital after normalizing for leverage.
Some may argue that correlation does not imply causation. Based on the level of interest and uptake in ESG related information from our clients, we believe it’s becoming an increasingly important part of the investment process and will likely continue to impact investor behavior in the future.
Need To Know | Bond yields are a good proxy for how expensive it is for a company to access debt capital. The ratio of net debt to EBITDA measures how much debt a company carries relative to how much cash flow it generates.
FIGURE 1 | E&P Bond Yields Versus Net Debt to EBITDA
FIGURE 2 | E&P Bond Yield Residual Versus Enverus ESG Score
Click below to learn about our Enverus ESG™ Analytics solution.
Ashley Zumwalt-Forbes is co-founder and president of Black Mountain Metals 1, Black Mountain Metals 2, Black Mountain Exploration and Black Mountain CarbonLock. Featured in Forbes’ 30 Under 30 in Energy in 2020, Ashley also sits on the advisory board for About Hennessy Capital Investment Corp. V, Female Venture Fund, Polestar, TCU Energy Institute and the University of Oklahoma’s Mewbourne College of Earth and Energy.
In this week’s Q&A, Ashley discusses her start in energy and where she sees the industry heading in 10 years, and shares advice for those entering the industry today.
What was your first job? My first job was as a carhop at Sonic in my hometown of Choctaw, Oklahoma.
What was your first job in energy and how did you get it?
After my sophomore year at OU (University of Oklahoma) studying petroleum engineering, I landed a reservoir engineering internship at ExxonMobil. I switched to an internship in drilling engineering the following summer and then was hired on at ExxonMobil full-time as a drilling and completions engineer upon graduation.
Who is your inspiration at work?
My forever all-time career hero is Sara Blakely, founder and CEO of Spanx.
What is the first thing you do when you start work in the morning? Talk to my Australian team before they go to bed to hand over or fight any necessary fires. Then I reply to emails. I’ll have a full day of Australian emails when I wake up.
What would you be doing if you weren’t in this career? I definitely anticipate that I would be sleeping more than I currently am — or at least hope that I would be. Jokes aside, I really love tangible assets. So, if I wasn’t in energy, I could see myself being involved in real estate development or something similar.
How do you relax? I love to hang out with my husband, friends and family. I am generally most functional when I am making time to work out and eat well, but those two things don’t always happen!
What was your favorite school subject? Why? Math — it always made sense to me and I liked that there was no room for interpretation. Numbers are very black and white. I also found that it really helped explain how the world worked.
What advice would you give someone entering the energy industry today? Be open-minded and constantly learn about new and evolving areas. I think approaching the energy industry as an entire value chain as opposed to only thinking about it as oil and gas — or another piece — will really benefit professionals looking to maintain a long, interesting and prosperous career.
What do you think the energy industry will look like in 10 years? I think it will be an incredibly lively, innovative and diversified space. I am a long-term believer in natural gas — particularly when coupled with CCS/DAC — but also think there are logical deployment opportunities for renewables, nuclear and inevitably new technologies. Energy storage will be a massive growth sector. I am a bit of a naysayer on large-scale hydrogen deployment but can see niche applications.
What book has helped you most at work? I read a book a week and find that reading helps me expand my viewpoint and way of thinking. Some of my recent relevant favorites are Daniel Yergin’s “The New Map,” Bill Gates’ “How to Avoid a Climate Disaster,” Bob Iger’s “The Ride of a Lifetime” and Phil Knight’s “Shoe Dog.”
What excites you about your job?
I really like the concept that you get out of something what you put into something – that is certainly the definition of entrepreneurship. There is no one else there to pass the buck to; if it needs to get done, you need to do it. In terms of sector, the energy business is one of the most fundamental industries in the world; I love being able to see the tangible impact we can make on the world.
Looking to connect? You can find Ashley’s LinkedIn here.
Interested in sharing your career in energy or contributing to the “Enverus Innovator” blog? Fill out the form here.
There are many terms circulating today regarding changes to how we power our lives. Are we experiencing a “transition” or an “evolution”? At Enverus, we see it as an evolution. The future of energy is an expanding mix of energy sources, not an elimination of them. From wood, water and oil, to wind and solar, we continue to pursue diverse sources of energy — and this isn’t anything new.
One thing is certain in the energy industry — change. Through emerging technology, data digitization or improved efficiencies, energy companies constantly adapt and evolve. Today, a new force affecting all industries, including energy, is emerging in response to shifting investor priorities — environmental, social and corporate governance (ESG).
These three factors are now commonly being used to measure a company’s societal impact. Investors are incorporating these new, non-financial metrics to help evaluate the long-term sustainability of a company’s cash flows and assess the risk of future regulatory changes and the ability to capture preferential sales of responsibly sourced goods and services.
For energy companies, responsible sourcing includes the various environmental impacts of the energy source in question. Because of the broad concerns related to greenhouse gas emissions, hydrocarbons come under the highest scrutiny today, but we believe over time that other energy sources will also be evaluated quantitatively for other environmental impacts. We are only at the beginning here.
Regardless of the energy source or audience, the challenges are data objectivity and visibility. Investors want, or need, to incorporate ESG parameters into their decision processes, but finding objective, decision-ready data is difficult. Likewise, businesses seeking to address their environmental impact and benchmark to peers are finding it hard to compile and analyze relevant analytics due to disparate data sources and a lack of standardization.
This difficulty is more than a bookkeeping annoyance. If businesses, for example, are unable to determine their CO2 footprint alongside their peers, they could experience higher costs of capital or lose out on potential future funding altogether.
Decision-makers that act today and drive their businesses to become industry leaders within this shifting landscape are going to set themselves up for success and allow themselves to continue capturing economic opportunity.
That first comes from a place of understanding the problem. What differentiates today’s leaders? What is an effective peer comparison? What data is available today and how will that change tomorrow?
These are important questions to answer for all energy companies — especially for those that will be around in the future. Evolution is not just for the energy mix itself, but for those who supply it and capitalize it.
So, how can the industry and investors understand ESG profiles?
Learn more about the importance of ESG for the energy industry here.
Learn more about Enverus ESG™ Analytics solution here.
Since the Biden administration took office in January, the risk to oil and gas producers with assets on federally administered land has been a dynamic debate. On his first day in office, President Joe Biden issued an executive order temporarily banning new leasing and permit approvals on public land for a 60-day period while questions around climate impacts were addressed.
Nearly a month ago when the moratorium came to a close, the Department of the Interior announced the Bureau of Land Management (BLM) would resume processing new permits on existing federal leases, but new lease sales would continue to be withheld as the agency furthers a formal review of the program. If the BLM were to indefinitely freeze new leasing, oil and gas reserves under unleased federal land or leases that are not yet held by production (HBP) are at risk of becoming stranded (Figure 1).
Enverus quantified the portion of remaining drilling locations in the Delaware Basin exposed to federal land risk and contrasted with the impact previously implied by a potential complete ban on new drilling (Figure 2). A drilling ban would profoundly impact the play’s inventory life by inhibiting access to 46% of remaining locations in the Delaware. The current political landscape, however, indicates a much lower inventory risk — only 7% of Delaware inventory resides on BLM-administered land that is unleased or on leases classified as not HBP (more severe case). Moving leases that are not yet producing but show signs of near-term activity as indicated by the presence of permits, drilled or completed wells to the HBP bucket (less severe case), the portion of Delaware inventory at risk drops to 5%.
FIGURE 1 | Federal Land and BLM Leases Across New Mexico Delaware Basin
FIGURE 2 | Portion of Delaware Basin Inventory at Risk in Various Federal Land Policy Scenarios
The threats of ERCOT power blackouts are emerging again this spring, just two months after millions of Texans survived freezing temperatures without heat or power during extended blackouts in February 2021.
On Tuesday, April 13, Texas’ power grid again faced failure as extended maintenance work and unseasonable weather patterns brought typical supply levels lower. ERCOT called for power conservation, and averted crisis by the evening, rescinding the request.
By Wednesday, April 14, Texas was again at risk for blackouts due to power supply issues. ERCOT declared it would be “capacity insufficient” from 1-8 p.m CDT. This means ERCOT does not have enough reserves and will ask people in Texas to conserve power again.
This is being caused by a weather pattern that is unusually warm for this time of year in South Texas. The results: strong demand and on-peak wind generation that is 6.5 gigawatts, compared with average April wind generation of 11 gigawatts. Solar generation was also lower. It hit only 38% during peak load on April 14, while the average is 72%.
The weather isn’t totally to blame for the power supply issues, of course. The large number of units that are offline for maintenance following the winter storm is also driving this shortage. The reported telemetered outages on April 14 is 21.1 gigawatts, where normally ERCOT would be measuring around 14.5 gigawatts of outages in ERCOT for the third week of April.
Austin, TX (April 13, 2021) — Enverus, the leading global energy data analytics and SaaS technology company, today announced an agreement for Hellman & Friedman (H&F), a premier global private equity firm, to acquire majority ownership of Enverus. Genstar Capital (Genstar), which has been Enverus’ majority owner since 2018, will remain a significant shareholder following the transaction.
Enverus is the leading SaaS company solely dedicated to the world’s largest market — energy. Enverus empowers companies to transform traditional decision making by accessing innovative cloud technology, machine learning/AI and industry-leading intellectual capital. With more than 1,400 professionals and 6,000 customers across the entire energy mix, Enverus supercharges the industry to deliver reliable, cleaner and more cost-effective energy to the globe. Our customers include 21 of the Top 25 Global Energy Companies, from E&P and midstream companies to power and utilities.
The investment marks a significant milestone for Enverus, enabling continued leadership, global growth and innovation.
“The investment from H&F and continued partnership with Genstar will enable Enverus to accelerate our development of market-leading software and analytics solutions for companies that serve the energy industry. H&F brings a wealth of experience in the software sector, and they are eager to support our vision of providing customers with the most accurate and actionable intelligence available so they can deliver energy to the world,” said Jeff Hughes, chief executive officer of Enverus.
Hughes added, “The investment is a strong signal in support of Enverus’ growth in predictive analytics, artificial intelligence and machine learning capabilities. We will continue helping our oil and gas customers break new ground with these technologies while also aggressively expanding them into renewable energy, power and ESG Analytics.”
“We are seeing a technology revolution in the energy sector and Enverus is the clear leader providing world-class SaaS solutions and innovation,” said Ben Farkas, partner at H&F. “The company’s state-of-the-art platform offers robust technology and powerful analytics delivering mission-critical insights to the world’s largest industry. This investment is an example of H&F’s strategy to invest in high-quality, market-leading businesses with an impressive runway for growth. We are excited to partner with Jeff Hughes, the Enverus leadership team and Genstar, as the company continues to help customers leverage the full potential of this digital transformation.”
“We have been extremely gratified by our partnership with the Enverus management team and their success combining a suite of product offerings and sophisticated data analytics platform for energy providers. Through organic growth and accretive acquisitions, Enverus has established itself as the technology leader in the energy market and we are excited to continue to support Enverus’ growth trajectory in collaboration with H&F,” added Eli Weiss, managing director at Genstar.
Goldman Sachs & Co. LLC served as financial advisor to Enverus and Simpson Thacher & Bartlett LLP acted as legal advisor to Enverus. Credit Suisse acted as financial advisor and Kirkland & Ellis LLP acted as legal advisor to H&F.
Enverus is the leading energy SaaS company delivering highly-technical insights and predictive/prescriptive analytics that empower customers to make decisions that increase profit. Enverus’ innovative technologies drive production and investment strategies, enable best practices for energy and commodity trading and risk management, and reduce costs through automated processes across critical business functions. Enverus is a strategic partner to more than 6,000 customers in 50 countries. Learn more at Enverus.com.
About Hellman & Friedman
Hellman & Friedman is a preeminent global private equity firm with a distinctive approach focused on investments in high-quality growth businesses. H&F seeks to partner with world-class management teams where its deep sector expertise, long-term orientation and collaborative partnership approach enable companies to flourish. Since its founding in 1984, H&F has raised over $50 billion of committed capital, invested in over 90 companies and is currently investing its ninth fund, with $16.5 billion of committed capital. Learn more about H&F’s defining investment philosophy and approach to sustainable outcomes at www.hf.com.
About Genstar Capital
Genstar Capital (www.gencap.com) is a leading private equity firm that has been actively investing in high quality companies for over 30 years. Based in San Francisco, Genstar works in partnership with its management teams and its network of strategic advisors to transform its portfolio companies into industry-leading businesses. Together with Genstar X and all active funds, Genstar currently has approximately $33 billion of assets under management and targets investments focused on targeted segments of the financial services, healthcare, industrials and software industries.
Enverus: Jon Haubert | 303.396.5996
H&F: Winnie Lerner | 917.375.5652
Genstar: Chris Tofalli | 914.834.4334
When it comes to growth strategy, oilfield service companies can take a lesson from operators. Even before the market took a nosedive in 2020, E&P companies had to turn their focus inward to find sources of free cash flow to fund growth. One area of focus is digitalization of processes with cloud technology solutions. Digitalization enables faster, more collaborative workflows — like invoice submission and ticket approvals — between different stakeholders, increasing operating efficiency. It also provides valuable operations data to guide your decisions for your business.
With the pressure of reduced activity and price cuts, oilfield services must reduce expenses to align with revenue and optimize cash flow. Long payment cycles from customers mean you pay expenses faster than revenue is received. Below are ways you can optimize cash flow and minimize the impact of price cuts and less revenue.
What can I do to protect cash flow?
You can protect your cash flow in two ways. Minimize DSO and look for opportunities to increase efficiency in your billing processes. We cover how to do this below.
What is DSO?
A way to measure how long it takes you to get paid is days sales outstanding (DSO). This metric is the number of days from when you submit the invoice to your customer until you receive payment. There is an additional part called invisible DSO, the time between when you provide the product or service and when the invoice is created. Invisible DSO can be days or weeks, and it costs your business money. The combination of invisible DSO and “traditional” DSO is known as effective DSO.
Why is minimizing effective DSO important?
If you focus on minimizing DSO, you get access to cash quicker. Access to cash allows more opportunity for reinvestment. Successful management of effective DSO also gives investors confidence, indicating a well-run enterprise. Think about creative ways to invoice and get paid faster. Why? Because billing terms begin the date of the invoice. But expenses, like payroll, vendor bills and credit card bills, occur in real-time. You won’t receive payment for the services you provide until weeks after you submit an invoice to your customer depending on your billing terms. That is why it is critical to invoice as soon as possible after the work is completed.
How can I reduce invisible DSO?
Invest in a digital field ticket solution. Most people do not think about adding a software solution to their operations during lean times; however, it will pay for itself very quickly by reducing your billing time. Slow times can be the best opportunity to introduce new solutions, since the training and processes will be in place once activity expands again. Customers using the Enverus Oilfield Services Suite FieldTicket application reduced their DSO from months to days.
Watch the video to see how Elite Production Services streamlines its operations with the Oilfield Services Suite.
How can I reduce DSO?
Early pay discounts give a percentage discount for customers that pay early. You do this because cash is so important you are willing to give up a few percentage points to get paid faster. Several OFS companies are increasing their early pay discount percentage to as much as 10% to get paid faster. The discount you give depends on your specific business, profit margins and any debt payments you must make. This tool can drive faster payment, especially if your customer asks for a price reduction anyway. You should always get something of value if you are giving something. In this case, you give up percentages of your revenue through price cuts, so if you turn that into an early pay discount, you have now gotten something of value in return.
Invoice factoring. Another way to minimize DSO is to finance your invoices from a third party. Commonly called invoice factoring, this simply means that once work is complete, you submit your invoice to a factoring company and receive payment on the invoice from them less a small fee. The company then collects payment from your customer. a trusted partner of the OpenInvoice network, helps service companies transacting on OpenInvoice bridge cash flow gaps by advancing payments for outstanding invoices within one business day.
How can we become more efficient in our billing processes?
To remain competitive, service companies need to operate and function more efficiently than in the past. While market activity is picking back up, you should still focus on how to do more with less — fewer resources, less cash and maybe less overhead support. The only way to accomplish this is by being efficient. Here’s what we recommend.
Streamline repetitive tasks. Look for repetitive tasks. Are you sorting through stacks of paper or big, complex Excel spreadsheets to get information? These simple things cause delays in processes that eat up hours or days. All of these are opportunities to become more efficient. If you find yourself entering the same information in two or three different places, this can be very time consuming and expensive. Many service companies use QuickBooks as their accounting system, but also must enter ticket or invoice data into a billing portal for their customer. You essentially enter the same information twice for every single invoice. There are apps, like Enverus Supplier Link, that will send the data from QuickBooks to OpenInvoice and other billing platforms automatically. That saves you tons of time by only needing to enter the data once into QuickBooks.
Invest in software. Digitalization of back-office processes with technology is a proven way to increase efficiency and save money. Maybe you could use a dispatch app to manage jobs, a payroll app to capture hours for payroll or an electronic field ticket solution. Again, most people do not think about adding a software solution to their operations during times like this, but if you can reduce your invisible DSO from days to just hours, the investment will pay for itself very quickly.
We’ve all had to adjust to these market events. By focusing on increasing efficiency in your billing and operations processes, you can reduce DSO, protect your cash flow and do more with less. Your business will benefit by these improvements in the long-term and set you up for future growth.
About Enverus OFS solutions
Enverus OFS solutions empower OFS companies to find deals faster and optimize operations so you can grow your business, reduce DSO and get paid faster. To learn more or request a free demo, fill out the form below.
Austin, Texas (April 8, 2021) — Enverus, the leading energy SaaS and data analytics company, has released its summary of 1Q21 U.S. upstream M&A activity. The report shows $3.4 billion in deal value was transacted during the quarter — an 88% decline from 4Q20. This is the third year in a row U.S. activity has started slow. Deals rallied in 2019 and 2020, and in 2Q21, activity has picked up with Pioneer Natural Resources’ $6.4 billion buyout of privately held DoublePoint Energy.
Q1 deal activity largely focused on production-heavy assets in legacy oil plays. Combined, the Bakken and Eagle Ford accounted for two-thirds of total deal value despite having only three significant deals across the two plays (two in the Bakken and one in the Eagle Ford). A strong rally in crude oil prices improving cash flow from these more developed areas likely helped spur the additional buyer interest.
Another distinguishing factor of Q1 activity was involvement by private equity firms. The top two deals of the quarter were both acquisitions by private equity-sponsored E&Ps: Grayson Mill Energy’s $900 million buy in the Bakken and Validus Energy’s $880 million Eagle Ford purchase. The next two largest deals were sales by Bruin E&P (formerly private equity-backed and then owned by creditors following a bankruptcy reorganization) and Grenadier Energy Partners II, which was sponsored by private capital providers EnCap and Kayne Anderson. Then, the first day of Q2 opened with a large sale by Permian-focused DoublePoint Energy, which has at least four private sponsors, to Pioneer in the largest acquisition of a private E&P in a decade.
“After most of 2020’s activity was dominated by mergers between public companies, we are seeing private equity play a more prominent role in M&A markets in 2021,” said Andrew Dittmar, M&A analyst at Enverus. “Following years of heavy investment in unconventional resources, private E&Ps were having a challenging time finding exits either through sales or IPOs and had consequently tamped back spending on new deals. Now, in December 2020 and continuing into 2021, we have seen several prominent exits plus new investments from the private side of the industry.”
Along with the sales by private equity companies, Q1 also saw the first notable IPO of a traditional upstream production company since 2017, when Haynesville operator and private equity-sponsored Vine Energy successfully made its debut on public markets.
“Going forward, private equity should continue to play an important role in upstream M&A both on the acquisition side targeting legacy areas that are being sold as public companies narrow their focus and as potential targets for public companies to buy using their now higher-priced stock as payment like Pioneer did to buy DoublePoint,” added Dittmar. “Consolidating additional private companies will also help address concerns that a ramp up in rigs on the private side might again send crude markets into oversupplied territory. Pioneer already announced plans to reduce DoublePoint’s seven rigs to five by the end of the year.”
That is not to say that all public company consolidation is completed, though. While many of the marquee names in the public E&P space in the Permian found deals in 2020, there is additional room to combine operations among small and mid-size Permian names as well as in areas like the Appalachian Basin and Bakken that have yet to see anyone play a dominant role as a consolidator.
Members of the media can contact Jon Haubert to request a copy of the full report or to schedule an interview with one of Enverus’ expert analysts.
Through its SaaS platform, Enverus is the leading data, software and insights company providing innovative technologies and predictive/prescriptive analytics, empowering customers to navigate the future. Enverus’ solutions deliver value to more than 6,000 customers in 50 countries across the upstream, midstream and downstream sectors, enabling the industry to be more collaborative, efficient and competitive. Enverus is a portfolio company of Genstar Capital. Creating the future of energy together. Learn more at www.enverus.com.
In this blog series, we discuss why digitalization and analytics for M&A are key to uncovering best practices and how to use data-driven decision-making to find these best practices, maximizing cost savings within a newly formed organization.
In article one, we discuss why digitalization of the back office lays the groundwork for the opportunity for economies of scale before, during and after an M&A situation.
A unified platform is critical for more collaborative, efficient processes, as discussed in article one. To realize economies of scale, you also need more structured spend management and a better understanding of your supply chain. Spend analytics are key to this formula. In this article, we dive deeper into why spend analytics are critical for an optimized supply chain and discuss specific examples of uncovering pricing best practices through spend analysis to maximize cost savings.
How do you achieve holistic spend understanding across two different organizations?
Apples-to-apples price analysis and price benchmarking has traditionally been impossible because companies report the same transactions in completely different ways.
In this example, the level of granularity captured in the GL process by Company A (left) is much more detailed than Company B (right). Company A has the type of commodity being used and provides the level of detail of how it’s being used.
Recognizing this as an industry-wide issue, Enverus normalized, categorized and attributed the $200 billion of spend data that flows through OpenInvoice to create OpenInsights.
Categorized and attributed data
Categories — Using machine learning and algorithmic approaches and working with a team of about 150 analysts across our organization, Enverus divided goods and services into categories. These include, for example, proppant, pipes, valves, and fittings and OCTG.
Attributes — Products and services can’t simply be placed into single categories because there are several different characteristics within these categories. In OpenInsights, the categories are divided based on 40 million different attributes. This creates a much more usable and reliable data set. Here is an example of categorized and attributed pipe data.
Let’s take a look at some examples of how you can use spend analysis to find cost-saving opportunities for a powerful Shale 3.0 growth strategy.
Use Case 1: Vendor consolidation
When two companies merge, the vendor network grows. Companies can use price analysis between suppliers to define preferred vendors. In the example below, the left graphic shows Company A had a fairly integrated supply chain. But Company B is even more integrated. When you bring these companies together, it results in a relatively consolidated market.
The bigger issue that operators see with this analysis was caused by market shifts over the last couple of years. As service companies went out of business or shifted markets, operators had to diversify their supplier networks. This led to more suppliers and more one-off transactions. Many transactions were project-to-project based, creating a decentralized supply chain strategy.
Use Case 2: Preparing for an integrated RFQ
Vendor consolidation isn’t just about choosing the lowest-cost provider. It’s important to understand that the cost you pay to a vendor for a product or service is a combination of the quality of the product and the services provided. Some companies are willing to pay more than the price of the product because a supplier works seamlessly with them.
In this example, we developed the distribution for intermediate casing prices across these four suppliers. There are so many different properties that define a pipe — grade, weight, range, end connection, material and coating.
To evaluate a more specific type of casing, we developed a taxonomy, a combination of attributes. Taxonomies are powerful tools for evaluating price discrepancies. Examining the price differential and the increasing volume of the merged company can lead to significant cost savings. Below is a concentration of price points for intermediate casing transactions across the same four suppliers using three variables. This allows for an apple-to-apples comparison.
For intermediate casing, note that Supplier A and D sell at three different prices, Supplier C sells at two different prices, and Supplier B has the most consistent pricing. This demonstrates the power of a digitalized supply chain. Supplier B has full implementation of price books, resulting in consistent pricing that has really helped the company.
Use Case 3: Determine pricing practices from a regional price index
Trying to reduce costs as a blanket effort is time consuming and inefficient. Enverus also offers regional market price indices for every category — chemicals, proppant types, mesh sizes or OCTG. Leveraging market indices and benchmarking allows you to find the key areas of concern and triage efforts. In a merger, you can use these market indexes to gain an understanding of how the two companies have performed in different categories compared to the market and identify specific areas for improvement.
In the example below, the market price is consistent for Category A (left). The gray zone, which is the variability zone, is shrinking for this particular product. But while pricing — Company A is the red line and Company B is the yellow line — starts low, Company A’s pricing starts to steadily increase. You might assume that Company B has better best pricing practices and adopt this strategy across the board. But when we did the same analysis with Category B, we found that Company A is more consistent. This showed that both companies have room to save money in these different categories.
As this low-price environment picks up, the industry will reorient itself with M&A to consolidate operations. Identifying and realizing economies of scale is almost impossible without a much more structured, individualized supply chain process in place.
Digitalization across your supply chain ecosystem allows for leveraging spend analytics to compare your spend to the rest of the market, driving decision-making processes and identifying cost savings and strategies moving forward. Successful digitalization of processes across the spend team to serve their needs provides more successful M&A analysis and best practice evaluation.
To learn more about how Enverus Business Automation solutions can help your company fast-track your M&A growth strategy, fill out the form below to speak to an expert.
The content for this article was sourced from our Cost Savings in M&A webinar hosted by Akash Sharma, director of OpenInsights, and Dave Savelle, director of Field Ticket Operations.
Every business wants to grow and growth needs strategy. In energy, one strategy for continued growth is M&A, especially when the market goes into increased volatility.
Acreage deals, when an operator wants to develop a major new area, focus on growth through acquiring new positions that don’t require significant DNC spending. These are more common and ongoing in the industry as operators move in and out of basins and regions.
The second half of 2020 was interesting as we saw more corporate deals than acreage deals — Anadarko and Oxy, Pioneer Resources and Parsley, Concho Resources and ConocoPhillips, Southwestern Energy and Montage Resources. Corporate deals are the merging of two independent companies. These are much more complex to manage.
The driver of these corporate deals is the potential of economies of scale, where the new company identifies the best practices from each company and then implements these best practices across the entire new organization.
I highlight the word “potential,” because to actually benefit from economies of scale, you have to be able to figure out which company has the best practices and then determine how to implement these practices across a new, larger organization comprised of two companies with independent, fully functional teams.
To start this process, you need to figure out which company has the best practice. If you don’t handle this properly, you can actually hinder potential growth.
The question is: How do you figure out which is the best practice between company A and B?
In this two-part blog series, we’ll discuss why digitalization and analytics are key to uncovering best practices and how to use data-driven decision-making to uncover these best practices to maximize cost savings within a new organization.
Digitalization of back-office processes — the foundation for economies of scale
Processes are linked closely to the back office. Digitalization of the back office lays the groundwork that creates the opportunity for economies of scale before, during and after an M&A situation. Why?
Because digitalization of processes does two things:
It enables faster, more collaborative workflows between different stakeholders within a company, increasing operating efficiency. A few examples include faster invoice cycles, faster spend visibility, reduced manual touchpoints with automatic invoice approvals.
It captures spend data that, when attributed and categorized properly, enables two companies to rationalize spend analysis across both organizations.
Choose the right solution to digitalize the right way
You need a single unified digital platform to support the needs of these different stakeholders, including your suppliers. With a unified platform, you capture spend data and can rationalize spend across two companies that are involved in a merger or acquisition.
Let’s look at an example to understand why.
In an M&A scenario, you begin with two different spend teams with many of the same responsibilities, but with different workflows, processes and allocation of dollars. A spend team comprises different arms of an organization, including procurement or supply chain operations, finance and audit.
They all evaluate the same spend, but view it from different perspectives to deliver their respective value propositions to their business.
Below are the groups that make up the spend team:
Procurement focuses on optimizing spend with suppliers. They manage and analyze supplier contracts and negotiate pricing.
Operations focuses on optimizing spend on a per project basis. Their perspective focuses wholly on the project and how and when to execute for the greatest business benefit.
Accounts payable and finance optimize spend based on a general ledger (GL), as well as tracking actual spend against estimates, using the GL to capture different levels of granularity in spend.
Audit optimizes company spend by overseeing supplier adherence to contracts and their execution. There are also recovery operations that take their findings and feed those back into supply chain and procurement to further optimize the supply chain. These operations are traditionally slow and expensive.
Here is a breakdown of the spend team:
Even within a single organization, the silos that naturally arise from the different departments can make it seem like members of the same spend team are speaking entirely different languages. But these different perspectives are equally important for maximum business efficiency.
This is why a unified platform is critical. It breaks down these silos, allowing faster collaboration on workflows between these stakeholders, including suppliers, and providing a single source of accurate spend data so individual stakeholders can analyze and manage this data according to their role.
Here’s an example of process optimization and workflow where the Enverus platform provides auto-approval of financial documents. This brings efficiencies to both finance and operations.
Here is an example of a spend understanding integrated workflow. Spend understanding is where the information provided in the spend data allows different groups to do their respective analysis.
This demonstrates cost management via strategic sourcing. Procurement has visibility into supplier pricing, an understanding of vendor rationalization, and workflow modeling. Process efficiencies across finance/AP, operations and supply chain allows for early-pay discounts that also contribute positive cash flow for the suppliers.
When evaluating process efficiency best practices between two merging companies,
if either uses a digital platform to manage its source-to-settle process, you can select performance metrics to identify bottlenecks and efficiencies in each company’s process and compare the two. For example, you can compare invoice processes by company to find the bottlenecks. You can also use industry benchmarks to measure progress. For example, our best-in-class OpenInvoice PriceBook customers have close to 90% price book rate validation. These metrics will help you make an informed decision about which best practices to implement company-wide to drive economies of scale.
This article is part one of a two-part series. To continue learning about best practices to accelerate your M&A growth strategy, read article two here.
To learn more about how Enverus Business Automation solutions can help your company fast-track your M&A growth strategy, fill out the form below to speak to an expert.
The content for this article was sourced from our Cost Savings in M&A webinar hosted by Akash Sharma, director of OpenInsights, and Dave Savelle, director of Field Ticket Operations.
So, what really happened last year? Our title really begs the question: Why do we need a survivor’s guide to 2020 if it’s over? It is important to review last year and analyze how we can adjust moving forward. We want to demonstrate that last year was tumultuous and we are still experiencing its consequences.
In early March 2020, two major events generated significant volatility in the industry: the COVID-19 pandemic and the price war between Russia and Saudi Arabia. These events demonstrated how volatile a place the oilfield is and reinforced the idea that the industry needs to be in a healthier state to handle these situations, as it will not be the last time we experience this type of volatility.
Enverus, as well as others, have covered extensively the reasons for the drastic volatility swings, so we won’t go over all these pieces individually.The graphic below provides a timeline of last year’s volatility. You see it beginin January, ramp up in February, and then we saw that the rest of 2020 had the steepest completion activity in two years as companies looked to unload capex.
A year in review
What’s not in the timeline above, but added to the volatility, is a tumultuous administration change that led to a lot of questions regarding the future of federal lands. Adding it all together, it was really a lot to take in!
First, let’s look at how the industry responded and what’s going to happen next. Then we can find out how we, as an industry, can be in a healthier place moving forward.
We’ll also discuss some of Enverus’ tools that can help you make faster and smarter decisions. The first piece comes from a general index for the oilfield service sector that the Dallas Fed puts together.
This is realized pricing throughout the sector based on survey responses throughout the year. We saw pricing and pricing support for oilfield services continue to fall throughout the year. To follow up on the general index, see below for an overview of a report written in April by Enverus’ analysts Mark Chapman and Jonathan Godwin.
Above compares data compiled in April — where we projected and predicted revenue reductions of about 50%, based on how much capex was going to be cut and where we saw activity levels headed — versus what actually happened in the industry and how the industry responded to those different pieces. It compares 3Q19 to 3Q20, with the green and pink dots representing revenue, tied to the left axis, and the bars representing revenue reductions, tied to the right axis.
What our analysis revealed was that revenue reductions in 2020 ranged between 25-65%, leading to a 50% overall reduction. Certainly, pressure pumpers saw, on average, a 65% reduction in revenue across the board due to frac holidays and other unforeseen events. The land drillers did a little better with about a 50% reduction in revenue, as we brought rigs down throughout the year; this drop tailed the frac activity drop. Other sectors varied between that same 25-65% range.
So, as we looked at a scenario where if nothing was done and the industry lost 50% of revenue, what was going to happen to Selling, General, and Administrative (SG&A) expenses? What was going to happen to Cost of Goods Sold (COGS)? And then what was going to happen to EBITDA margins?
We predicted that OFS companies would have to drop about 25% to stay profitable. What we saw was a range between 18 to 35%, in line with our prediction. A great example of the OFS industry’s uniqueness is its ability to flex up and down to survive. This comes from quick responses to downturns and upturns. However, this “quickness” can be costly as over or underestimating can lead to layoffs when activity decreases versus the need to hire back when activity increases.
We projected COGS would be relatively in line with the revenue reductions. If we were to overlay the chart above with the revenue reductions for pressure pumpers, we see that a 65% revenue reduction mapped in line with the 65% COGS reduction. Now, if companies can have COGS reduction greater than revenue reduction, they will have a better ability to scale costs with the market. In this case, digital technologies have helped the industry be more efficient with time, people and money spent on location.
We will now evaluate EBITDA. We use it as a measure of earnings in order to level all debt and to look at what is pure profitability from how these companies operate from an SG&A and COGS standpoint.
Here we see that many companies experienced an astounding EBITDA drop — greater than 100%. As an industry, we were already on the cusp of profitability considering price reductions. EBITDA was impacted when price reductions combined with the SG&A level.
Similarly, EBITDA margins show a lot of the same characteristics. We see margins remaining relatively flat for some of the major integrators; but pressure pumpers struggled through that time, while land drillers were able to maintain a fair amount of profitability. The biggest difference being the punitive clauses that land drillers included in their contracts to maintain a rig on standby, versus a frac crew being fully dropped. This shows there is a lot more volatility in that pressure pumper space, and an extra supply in that space that needs to be consolidated and rationalized. This creates the volatility we currently see in the OFS community.
Now, to answer our questions: What has happened? And how has the industry responded?
We need to understand what’s next in order to survive and thrive through another similar time period. So, let’s focus on capex and completion activity.
We expect 2021 capex and revenue to remain relatively flat year-over-year compared to 2020. We do, however, expect that capex spend will be more evenly distributed this year. In fact, we see an opportunity for capex spend to increase in the second half of 2021, a change from the past, especially in 2019, where capital expenditure efficiencies forced capex spend to be reduced in 2H2019 to the detriment of the OFS industry as activity fell off.
We are also expecting completion activity to be flat. Being one of the closest proxies to understand production, we expect companies will try to hold production flat. That means that 2021 completions will look similar to the 8,300 to 8,400 we had in 2020. This leads us to the idea that we are currently burning DUCs. From that standpoint, we are certainly outpacing the level of supply coming from rigs now, and with continued price support, rigs will continue to pick up throughout the year. Completion activity should respond quickly without a commensurate response, so we could be looking at a situation where we burn down our DUC inventory to the point where we will have to drop completion crews quickly in late 3Q and early 4Q. We should see drilling activity picking up as operators realize they will not be able to keep pace with the completions.
So, what could we have done differently and how can we now look at the market to help make decisions that would change the way businesses operate? The answer, it is essential to look at today’s market from different perspectives. A macro point of view with unique local markets and AOI perspective, that includes ESG, gives OFS companies a particular perspective to how they can partner with operators and be in the right place to find new business opportunities.
To learn more about how Enverus can help you get a unique perspective that can give you a competitive edge, fill out the form below or email us at [email protected].
Are we seeing the first little clawbacks of price creep back in drilling and completing new wells? We don’t have a lot of evidence yet, but a few signs of increasing prices for oilfield services (OFS) are appearing on the horizon. For example, Devon Energy said that per unit expenses are up by ~5% in the quarter as a result of severe winter weather in Texas. We know the February freeze generated some supply scarcity after temporary shutdowns across the state of sand mining, chemical blending and even chemical feedstock from the refineries. This capacity was not down for long, days to a week in most cases, but this lack of production caused a drawdown on supplies of consumables.
The temporary shortages will work themselves out, but let’s consider recent tough times for OFS companies. Last year they had to turn inventory into cash to survive a sharp drop in drilling and completion activity after oil prices crashed; now they are expected to turn cash back into inventory when service prices are at all-time lows but those for raw materials (steel, diesel and chemical feedstock) costs are increasing. It is difficult for OFS firms to sink even more cash into restarting facilities and refurbishing equipment in storage without a guarantee of stronger pricing. Additionally, staff shortages could also push up prices. While some oilfield hands that will always be oilfield hands, a truck driver can change industries to one that is less cyclical, meaning OFS companies may have to pay up to attract back workers.
The OFS sector gained new efficiencies and new abilities to work lean throughout the 2020 downturn, lessons that will stick around for a while. We will be looking at our OpenInsights Market Indices (Figure 1) for data on how the various factors play out. What do you think will happen?
Austin, Texas (March 31, 2021) — Enverus, the leading energy SaaS company, announced today that it has acquired Energy Acuity, the leading provider of power generation and power delivery market data with specific expertise in renewable energy. For more than a decade, Energy Acuity’s large team of domain experts has tracked and catalogued thousands of renewables projects leveraging hundreds of unique data sources across North America.
“As energy markets rapidly evolve and investments in renewable generation increase, the need for analytical solutions to capitalize on this opportunity will also grow,” said Manuj Nikhanj, president of Enverus. “Over the past five years, our company has made significant investments through targeted acquisitions and organic development. The addition of Energy Acuity will allow us to create the most comprehensive end-to-end energy offering in the industry.”
“The market for renewables-focused data, insight and predictive analytics is clearly growing and our customers continue to signal that more advanced solutions are critical to maintaining a competitive edge,” said Brian Graff, founder of Energy Acuity. “As part of Enverus, we will be able to incorporate multiple new data sets and leverage the 200-person analyst and data science teams to create full forecasting capabilities, satellite tracking and valuation models of existing and proposed projects.”
Enverus will integrate Energy Acuity’s data into Prism™, the company’s hallmark single technology platform. The combination with Enverus’ existing power and renewables data and analytics will allow Enverus to produce unique content and insights for existing and prospective developers, institutional investors, and corporate and government clients.
Energy Acuity has more than 30 employees in Denver, Colorado. Bernadette Johnson, who was recently promoted to senior vice president of Power and Renewables at Enverus, will oversee the integration.
About Enverus Enverus is the leading energy SaaS company delivering highly-technical insights and predictive/prescriptive analytics that empower customers to make decisions that increase profit. Enverus’ innovative technologies drive production and investment strategies, enable best practices for energy and commodity trading and risk management, and reduce costs through automated processes across critical business functions. Enverus is a strategic partner to more than 6,000 customers in 50 countries. Enverus is a portfolio company of Genstar Capital. Learn more at Enverus.com.
About Energy Acuity
Energy Acuity is a leading provider of information and intelligence on renewable power and clean energy markets. Founded in 2008 with a keen focus on delivering best-in-class market insights to accelerate the clean energy transition, the company’s product suite provides comprehensive and high-quality datasets covering power generation and grid infrastructure. Energy Acuity provides clients with the analytics and awareness necessary to identify forward-looking market trends and create and execute market strategies throughout the industry. Learn more at EnergyAcuity.com.
The U.S. leads the world for per capita consumption of primary energy harvested directly from natural resources (Figure 1). While oil, solar and hydro are examples of primary fuels, electricity isn’t. Rather, different types of primary energy are transformed into power that turns on lights at the flick of a switch. The maturing of the U.S. economy and the push to decarbonize because of climate change mean the mix of suppliers of primary energy in the future will be different from today’s.
We expect total U.S. consumption of oil, natural gas, coal, renewables and nuclear to decline ~10% over the next 20 years. Tighter CO2 emissions standards and increased penetration of electric vehicles will shave gasoline demand over the next decade by more than 1 million barrels of oil a day, according to our estimates. But it’s not all bad news for the petroleum industry as we expect natural gas will maintain its share of the U.S. fuel mix over this time frame.
President Joe Biden is preparing a $3 trillion infrastructure plan that will include large sums to modernize the country’s the electrical grid. We think the emphasis should be on building infrastructure to give regions with better renewable resources access to demand centers. Delays in building U.S. transmission infrastructure are already resulting in an uneconomic allocation of capital investment in renewables-fired generation. Regions with higher potential to displace coal-fired generation/carbon-heavy generation are being passed over in favor of those, such as California, where current renewables-based generation is being curtailed due to oversupply.
FIGURE 1 | Primary Energy Demand per Capita vs. GDP/Capita (Log Scale)
Economic logic dictates that lowest-cost oil producers will survive longest once oil demand peaks, plateaus and starts to decline. In a shrinking market, OPEC low-cost oil producers, mostly operated by state-held national oil companies, should be able to maintain their market share and even expand it as higher-cost competitors falter.
But if the volume outlook is broadly positive, OPEC producers’ oil price hawkishness comes at a price. OPEC’s readiness to extend an oil rally that has lifted Brent $15/bbl so far this year (Figure 1) is creating tensions with some of its key strategic customers. Indian government complaints about high oil prices drew a somewhat undiplomatic response this month from Saudi officials, who proposed Indian refiners draw down cheap oil stocks purchased when crude prices were at their 2020 lows. Saudi officials justified its hawkish price stance by pointing out that producers were only now recouping revenue losses incurred last year.
Saudi Arabia primed Brent’s rally through its slow and cautious return of output cuts, conservatism it justified by pointing to a raft of uncertainties besetting the global economy. But Riyadh has been less quick to acknowledge that a building headwind to economic recovery post-COVID-19 has been the sharp run-up in commodity prices themselves, particularly energy. For oil, it has been unilateral Saudi cuts this year and Saudi pressure to slow the return of OPEC+ cuts that has driven oil prices higher and roiled consumers.
Unsurprisingly, Indian government officials were unimpressed. Delhi has now injected fresh momentum into efforts to diversify its sources of crude away from Middle East producers. February import data suggests this policy is beginning to bear fruit with Indian refiners taking more U.S. and Nigerian oil at the expense of Saudi and U.A.E. barrels, where import levels were at multi-year lows. Further reductions to Saudi imports are evident in nominations for May deliveries.
Changes to Indian refiners’ import slates will not reduce oil prices, so diversification of imports is more symbolic than meaningful. But it does highlight growing tensions between the Gulf’s largest oil exporter and one of the remaining growth markets for exported oil. In this price cycle, OPEC producers might be advised to pay close attention: the removal of domestic fuel subsidies in recent years means Indian consumers’ capacity to absorb oil price rises is reduced.
At the same time, Iran, whose oil exports have been constrained by U.S. sanctions since the Trump administration withdrew from the 2015 nuclear deal, is playing a very different game. With prospects for a diplomatic breakthrough improving, Iran has started re-engaging with Chinese buyers, particularly Shandong independent “teapot” refiners as well as Indian state and private buyers.
Iran has a long history of sweetening terms for its crude by allowing buyers to pay in local currencies, take advantage of deferred payment terms, use barter arrangements and offer price discounts. Whether such a flexible approach reflects Iran’s immediate need to carve out its market again or whether it will endure longer term remains an open question. Iran is unlikely to miss out on the opportunity to undercut competing Arab Gulf barrels, even if temporarily, in what is likely to become a febrile oil market for producers in the years ahead as demand shrinks.
From the Saudi perspective, the continued recovery in demand means extra Iranian barrels will be absorbed and that short-term discounting presents less of a challenge. As annual oil demand shrinks and flatlines, these kinds of behaviors will raise tensions both between petrostates and their customers; and also between producers themselves, increasingly chasing the same customers.
The cold snap that hit the central U.S. in mid-February not only crippled Texas, but also supported price spikes from neighboring states all the way to California.
The Southwest Power Pool (SPP) and Midcontinent Independent System Operator (MISO) manage the electricity grid for Oklahoma (SPP) and Louisiana (MISO). In addition, the California ISO (CAISO), which manages SP-15’s southern California area, was impacted by high natural gas prices that sent wholesale power prices soaring.
During the cold snap, MISO and SPP sent out emergency alerts on February 14, 2020, for February 16-17 as load shedding, or demand reduction, was expected. Record load of over 42 GW was measured Monday and Tuesday in SPP. Blackouts were experienced in Oklahoma and Louisiana with 75,000 of Entergy’s MISO south residential clients losing power and SPP shedding load Tuesday morning. Prices in MISO south moved as high as $3,000 on the evening of February 16 and nearly $20,000 the evening of February 15 in SPP.
In California, where temperatures were mild, gas prices were ~$128/MMBtu from Feb 12-15. Power prices were nearly $1,000 the morning and the evening of February 17.
Several natural gas facilities had to shut operations because electric power was cut off from the Electricity Reliability Council of Texas (ERCOT), but currently public available data are not available to measure exactly which plants lost power supply.
What we can see in currently available data is by how much and when gas flowing on interstate transmission pipelines declined. The observable interstate system in Texas currently represents 25-30% of activity. Therefore, it is not a complete picture, but it does provide some leading indicators about what the final data may eventually show.
For example, the following table shows gas flows by category from the pipeline sample in Bcf/d for various time periods leading into and during the event:
Gas Flows by Meter Type, in Bcf/day
From this we can see that no part of the ‘upstream’ sector was immune to the event and we can start to infer that perhaps the Processing stage of the supply chain was disproportionately affected. However, it is important to re-emphasize this is merely early indication and by no means conclusive.
We can reasonably conclude that operations continued generally as normal ahead of the weekend that began on Feb 13. By February 15, the declines were in full effect and following Feb 18 the system rapidly returned to normal as the weather warmed.
How Closely Related Was ERCOT’s Outage to Price Spikes Beyond Texas?
Since the natural gas transmission grid is nationally connected, there were coincident effects on other regions.
It is not accurate to imply that Texas alone was responsible for all of the neighboring regions price spikes. However, the largest population demand centers will often have the most significant effects on the entire network.
This weather system affected the entire mid-continent region from the Canadian provinces all the way to southern Texas. Natural gas processors in Oklahoma struggled equally because it was simply dealing with the same weather issues as Texas.
Another way to look at this is to consider market action on the west coast in California. Here the region was not affected by the cold weather, but price action was also significantly higher than normal. This region relies on Texas and the Rocky Mountain regions for a large portion of its gas supply, both of which were underperforming due to the weather-related issues.
Therefore, California had to turn to rely on above average withdrawals from local storage facilities to fill the gap. As a result, prices soared above $110/ MMBtu but not as high as the West Texas prices that were north of $200.
California normally prices at a premium to Texas to keep the pipeline supply flowing west. As you can see, that premium disappeared, but California still had to set extremely high prices to incent larger storage withdrawals than the relatively normal weather experienced there.
An underrated part of the Alberta gas story has been the steady increase in provincial gas demand over the past decade. Daily demand in the province reached an all-time high in February of 7.69 Bcf/d, passing the previous record of 7.52 Bcf/d set in January 2020 (Figure 1). While last month’s weather was undoubtedly frigid in Alberta, annual gas demand rose ~50% since 2011. Said another way, cold weather is only part of the story.
The primary driver of this demand growth has come from the oil sands, particularly from the ramp-up in production from steam-assisted gravity drainage projects (where gas is burned as part of the extraction processing). Gas consumption from the oil sands jumped ~70% over the past decade while residential, commercial and industrial (RCI) demand grew 40% over the period (Figure 2). While Albertan gas prices have been challenged over the past five years, albeit with some reprieve in the last two, it’s hard to imagine where some producers might be without this acceleration in local gas demand.