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THE EXECUTIVE PUBLICATION FOR THE OIL AND GAS INDUSTRY

MARCH 2015

MACQUARIE SEES
OPPORTUNITIES
IN DOWN MARKET
SPECIAL REPORT:

ENERGY BANKING

E&P IMPAIRMENTS
BAKKEN BOOM BUSTED?
RESERVE-BASED LENDING

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A RECORD OF STRENGTH
Strength is the result of years of work, and is forged out of conviction and
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Through continued determination and a focus on execution,
our company can only grow stronger.
To learn more, visit: rangeresources.com

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LINN acquires, develops and maximizes cash flow from a growing portfolio of long-life
oil and natural gas assets. Since inception, LINN continues to be one of the industrys
most successful MLPs. Thanks to our people, strategy and assets we remain a leader
in the industry.
Visit www.linnenergy.com or call 281.840.4000 to learn more about LINN.
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CONTENTS
V12/N O . 3 | MARCH 2015

THE EXECUTIVE PUBLICATION


FOR THE OIL AND GAS INDUSTRY

FEATURES
16

24

COVER STORY
MACQUARIE BANK
Headquartered in Sydney, Macquarie is
Australias largest investment bank. OGFJ
recently spoke with senior officials Nick
OKane, Head of Energy Markets; Paul Beck,
Head of Upstream Capital; Nick Butcher,
Head of Americas Infrastructure and US
Energy; and Nicholas Gole, Head of Energy
and Infrastructure Financing. The four
executives came together in Houston to talk
with OGFJ about Macquarie and its place in
the energy sector.

28

14

IMPACT OF OIL PRICES ON INVESTORS

24

E&P IMPAIRMENTS

28

50

BAKKEN BOOM TO GO BUST?


ND players feel squeeze of weak oil prices,
safety regulations

ON THE COVER
From left: Nick
OKane, Paul
Beck, Nick
Butcher, and
Nicholas Gole.
Photo by
Sylvester Garza

32

50

OIL AND GAS SECURITY


How standardization and continuity improve
decision making, create cost savings

53

OIL AND GAS DISCLOSURE RULES


Part two of a three-part series

DEPARTMENTS
06 EDITORS COMMENT
08 CAPITAL PERSPECTIVES
10 UPSTREAM NEWS
12 MIDSTREAM NEWS
56 DEAL MONITOR
58 INDUSTRY BRIEFS
60 ENERGY PLAYERS
64 BEYOND THE WELL

ANADARKO STACKED PLAYS

35

64

ENERGY BANKING SECTION

38 RESERVE BASED LENDING


42 PROJECT FINANCE

Oil & Gas Financial Journal (ISSN: 1555-4082) is published 12 times per year, monthly by PennWell, 1421 S. Sheridan Rd., Tulsa, OK 74112. Periodicals Postage Paid at Tulsa, OK, and additional mailing offices. POSTMASTER: send address changes to Oil & Gas Financial Journal, P.O. Box 3264, Northbrook, IL 60065. Change of address notices should be sent promptly with
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OGFJ

.com

PennWell Corporation
1455 West Loop South, Suite 400, Houston, TX 77027 USA
Tel: (713) 621-9720 Fax: (713) 963-6285
www.ogfj.com
Vice President and
Group Publisher
Mark Peters
markp@pennwell.com

Associate Publisher
Mitch Duffy
(713) 963-6286
mitchd@pennwell.com

Editor
Don Stowers
dons@pennwell.com

Senior Associate Editor


Mikaila Adams
mikaila@pennwell.com

Editorial Creative Director


Jason T. Blair
Contributing Editors
Laura Bell, Paula Dittrick, Larry Hickey, Brian Lidsky,
Debbie Markley, Per Magnus Nysveen, Tammer Qaddumi,
Nick Snow, Imre Szilgyi, Don Warlick, John White

FEATURED CONTENT

Get up-to-date news and featured content on OGFJ.com


daily. Despite a brief uptick, depressed oil prices continue to
make waves throughout the industry. Through project delays,
employee layoffs and other measures, companies press on. US
land rig count in January dropped by nearly 200 rigs and the
count is expected to decline through Q2 2015, said analysts with
Wood Mackenzie recently. Read more analysis and thoughts
about when we might see a turnaround. While on OGFJ.com,
check out our Photo of the Day slideshow, our Energy Players
slideshow, and much more.

NEWSLETTERS
OGFJs newest offering, the OGFJ Weekly, provides quick
access to trending content from OGFJ. Spanning the previous
seven days, OGFJ Weekly content is compiled from OGFJ.com,
Oil & Gas Financial Journal, and OGFJ newsletters. Access the
weeks top content, as well as any breaking news, with this recent
addition to the OGFJ newsletter lineup. Sign up to receive the
OGFJ Weekly, or any of our existing newsletters, free at ogfj.
com/newsletters.

GET SOCIAL
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milestone! If you havent yet, please join our growing social
community! Find us on Twitter (@OGFJ) and Facebook and join
the Oil & Gas Financial Journal group on LinkedIn. Follow along
with other petroleum industry executives, managers, analysts,
and investors looking for credible, useful information about oil
and gas industry developments and join the discussion today.

COUNTRY REPORTS
Spanning oil & gas industries of Norway, Scotland, South Africa,
Mexico, and many more, OGFJs Country Reports page hosts a
diverse selection of reports containing exclusive interviews with
oil and gas leaders from around the world, offering an insiders
view on whats hot in various markets.

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Editorial Advisory Board


E. Russell Rusty Braziel, RBN Energy LLC
Michael A. Cinelli, Locke Lord LLP
Mickey Coats, BOK Financial
Adrian Goodisman, Scotia Waterous (USA) Inc
Cleve Hogarth, Quorum Business Solutions
Bradley Holmes, Investor Relations Consultant
Maynard Holt, Tudor, Pickering, Holt & Co.
Carole Minor, Encore Communications
Jaryl Strong, BHP Billiton
Andy Taurins, Lantana Energy Advisors
John M. White, Roth Capital Partners
Ron Whitmire, EnerVest Ltd.
Regional
Sales Manager
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(713) 963-6256
rmcgarr@pennwell.com
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Custom Publishing
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Official Publication

CORP. HEADQUARTERS
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P. C. Lauinger, 1900 1988
Chairman Frank T. Lauinger
President/Chief Executive Officer Robert F. Biolchini
Chief Financial Officer/Senior Vice President Mark C. Wilmoth

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EDITORS COMMENT

State of the oil market


IN LAST MONTHS COLUMN, we talked

about the history of oil prices and the extreme volatility that has characterized
global oil prices since the 1970s. We went
from a flat-line graph from 1946 to 1973,
and from then to the present day, prices
have tended to ascend and descend rapidly, based mainly on simple supply-and-demand economics.
DON STOWERS
Oil prices and forecasts about future
EDITOR OGFJ
pricing are the focus of nine out of ten conferences and meetings Ive attended the past six months, or at the
least theyre the elephant in the room. Therefore, lets delve into
that issue a little more this month.
Conventional wisdom about the oil price downturn is that what
went down quickly will recover just as fast. The most common scenario I hear these days is that prices will remain somewhat stagnant until mid-year when they will start to recover, and that oil
prices will be in the $65 to $70 range by year-end. However, I seldom hear a convincing explanation as to why that is going to happen. As this is being written, the WTI price has dipped below $50
again, and Brent has dropped below $60.
Rusty Braziel, head of RBN Energy and a member of OGFJs Editorial Advisory Board, recently delivered a compelling analysis on
US natural gas and oil production during a Genscape webinar in
February. He predicts that we could see WTI prices return to the
$80 per barrel range by 2017, assuming the market responds correctly to energy demands. On the other hand, if resilient production
by US operators keeps volumes growing while demand does not
respond, we could see WTI prices trading in the $50 to $60 range or
lower through 2020.
The latter scenario would not be good for the oil industry in
North America shale producers, in particular. Although oil economics vary considerably from play to play and even within plays,
the widely accepted break-even price on a macro scale is about
$65/bbl. If prices remain below $65 for the next five years, there will
be a shake-out in the industry like weve never seen before.
Braziel says that if producers pull back on drilling and focus
their existing rigs on their highest yield sweet spots, we will see
enough resiliency and efficiency to avoid harsh impacts on production growth.
Ole Hansen, head of commodity strategy at Saxo Bank, recently
noted that there are some positive drivers that may help oil prices
recover this year. Among them:
a sharp reduction in the US rig count to a three-year low;
major oil companies reducing future investment plans;
a US refinery strike that has (temporarily, at least) given products a lift;
shorts covering after short positions have doubled in the past
month;
a weaker US dollar;
reduced supplies from Libya as fighting there intensifies; and
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investors piling $2.4 billion into energy exchange-traded funds


(ETFs) since January 1.
Hansen said, These are all relevant factors, and if maintained,
they will help reduce the current supply glut. The major problem
with a sharp rally at this relatively early stage is the fact that US
shale oil producers have been handed an olive branch in terms of
being able to forward-hedge their production.
In its 2015 crude oil outlook report, Morgan Stanley noted that
the current low-price environment is a self-inflicted crisis. Although analysts at the firm say that oil prices face their greatest
threat since 2009, they expect a volatile 2015 rather than a one-way
trade.
Without intervention, physical markets and prices will face serious pressure with the second quarter of 2015 likely marking the
peak period of dislocation, says the outlook report, which added
that the coming oversupply is grossly exaggerated and that only a
modest fix is required.
Morgan Stanley added that the firm sees several factors that
could contribute to a recovery, potentially as early as the second
half of this year.
In an extreme scenario, said the analysts, shut-in economics
could be required. The risk of material oversupply is high by 2Q15,
they said, even though dislocations are unlikely to match prior crises. The only true floor in an oversupplied market, they said, is cash
cost (estimated at $35/bbl to $40/bbl). The outlook concludes that
the analysts expect OPEC intervention or lost production will prevent this, but the lagged fundamental impact and sentiment could
push prices to these levels for a brief period.
Yikes! On the one hand, they say that the oversupply situation is
grossly exaggerated and that only a modest fix is required. But on
the other hand, they say shut-in economics may be required and
that prices could fall as low as $35/bbl, albeit for brief periods.
With that kind of optimism, I would hate to read a pessimistic
scenario for 2015 and beyond. The main point I agree with is that
this is largely a self-inflicted crisis.
Although producers and vendors in the United States and Canada are feeling the brunt of low oil prices currently, this pales with
what is happening in Mexico. That is the gist of a Feb. 4 discussion
at the Woodrow Wilson International Center for Scholars, as reported by Nick Snow, Oil & Gas Journals Washington editor:
Mexico is a perfect storm a serious production decline and a
low oil price, said Duncan Wood, who directs the centers Mexico
Institute. It instituted modest energy reforms that look more like
service agreements than production-sharing contracts. This might
explain why only seven [international companies] have asked to
see data rooms for the 14 offered contracts. Theres a perception
that the program has failed.
Continued low prices could force Mexicos government to make
moves to make the program more attractive to investors, said
Wood.
Well, at least that would be one good thing to come out of the
current down market.
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CAPITAL PERSPECTIVES

Commodity trading house challenges


MAINTAINING STRATEGIC AGILITY DURING SEISMIC FINANCIAL REGULATORY SHIFTS
ALEXANDRA DOBRA, KINETIC PARTNERS, LONDON

AS FINANCIAL REGULATORY and compliance require-

ments (i.e.: EMIR, Dodd-Frank Act, REMIT, MiFID II, MAD/


MAR II, etc.) have become a top challenge for commodity
trading houses, and given also the wider market movements, how can commodity trading houses secure their
strategic agility by maintaining their reputation, remaining
competitive, reducing risks, protecting franchise value and
capturing market opportunities?
STATE-OF-THE-ART COMPLIANCE STRATEGY

The very fact that financial regulation has been identified as


a top agenda concern for the C-Suite for 2014 reinforces
that most companies have silo-based approach for responding to financial regulation, characterized by a reactive execution that leads to continuously increasing compliance
costs and compliance risks. In addition, with the increasing
expansion and increasing complexity of commodity trading
houses, through acquisitions and internal growth, a silobased compliance function proves to be even more inadequate. On the other hand, a holistic regulatory compliance
function is the only solution for managing the ever-changing financial regulatory landscape. Such a function unifies
fragmented structures, systems and processes. It can reduce costs by identifying and eliminating overlapping and
redundant assessments, controls, reports and tests, ensure
resilience by aligning risks and controls effectively and
adapting these as the business changes, increase agility by
supporting operating model changes and foster a proactive
approach towards financial regulation.
In addition, a holistic compliance function must be effective and result in optimization and costs savings through
support from: (i) a robust financial regulatory program
management; (ii) an integrated IT landscape; and (iii) the
promotion of an ethical culture. An integrated IT landscape
aims to consolidate the systems landscape, optimize data
usage, reduce manual workarounds, and reduce costs. An
integrated IT landscape can save up to 35% of the cost per
trade basis and can increase intra-group homogeneity by
establishing consistent data taxonomy. The importance of
having strategic IT investments is further reinforced by the
fact that commodity trading houses often have legacy systems requiring constant manual workarounds that reduce
cost efficiency and increase risks. Furthermore, an integrated IT landscape should be supported by IT investments focused on implementing trading surveillance systems and
data analytics to ensure data quality and integrity and allow
sophisticated risks modelling. Lastly, promoting an ethical
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culture is aimed at resulting on the medium-term to bring a


cultural shift in the approach towards financial regulation
and it therefore can reduce the risks of non-compliance.
REDEFINING THE BUSINESS STRATEGY

Commodity trading houses will need to re-evaluate their


current business models based on sophisticated scenarioselection and sensitivities definition tools (that would assess the impact of various regulations) and build on the operational focus and geographic footprint of the organization.
As such, commodity trading houses can decrease both their
flexibility in terms of traded contracts and their footprints
in certain geographic areas to reduce cost-structures and to
decrease the level of their exposures in heavily-regulated
hubs by restructuring some of their core operating entities.
However, as regulatory agencies are actively tackling the
case of regulatory arbitrage, such a move might entail advantages on the short term only. Lastly, commodity trading
houses through the implementation of new methodologies
and metrics can improve their risk exposure and their performance management function in order to improve the
cost to income ratio.
As access to capital and to sources of funding is becoming scarcer and more expensive, commodity trading houses
will need to optimize access to capital and funding. One basic measure is to calculate the profit velocity and allocation
of capital by trading books and prioritize those with the
strongest potential for increased profit margins. Independent commodity trading houses will also continue to increase their investments in upstream assets, however this
will make them more vulnerable to resource nationalism. In
addition, commodity trading houses moving towards a
more integrated business model will need to balance the
short-term-term investment capital with the long-term investment capital approach. Finally, as investment banks are
deleveraging their commodity trading practices, commodity trading houses could find an opportunity for tacking
these over and therefore optimizing their access to capital.
However, turning this into a market-making opportunity
will depend on the balance sheets of the commodity trading
houses. Another market-making opportunity can also arise
with the development of alternative energy sources and the
related financial market that will grow in both volume and
scope.
Another option is to optimize funding through securitization and new asset classes, such as the securitization
commodity trade loans offered by BNP-Paribas since 2013
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CAPITAL PERSPECTIVES

or to access funding through investors


such as sovereign wealth funds
(SWFs). As SWFs are looking to capitalize on the expected long-term commodity prices, they play an increasingly important role in driving M&As
and alongside offer the possibility to
commodity trading house to sell minority stakes. Examples of the role of
SWFs include the Qatari Wealth Fund
which bought positions in Total and
has also accelerated the takeover of
Xstrata, in which its stakes were above
10%, Plc by Glencore International
Plc. SWFs have also played a pivotal
role in the acquisition by Sinopec of
Addax Petroleum and the investment
in Teck Resources by China Investment Corp. Commodity trading houses can also boost their access to secured funding with low beta exposure
through setting up independently
managed commodity trading funds
(i.e.: Black River for Cargill).

A holistic regulatory compliance function is the only solution for


managing the ever-changing financial regulatory landscape. Such a
funtion unifies fragmented structures, systems, and processes.

Alexandra Dobra is a senior associate at Kinetic


Partners, a division of Duff
& Phelps, working on financial regulation and
risk. Her experience is in
financial regulatory strategy, risk and
research (quantitative and qualitative). Previously, Dobra worked at Accenture in London in the Institute for
High Performance and in the Commodity Trading and Risk Management
practice. She was also part of the FIAISDA MiFID II/R working group on
commodities, which acts as an industry response group to the European
Securities and Market Authority. She
has interned with Ellington Technology Group, where she advised on a
post-IPO expansion strategy and at
the European Parliament where she
advised on economic policy. Dobra is
a recognized thought leader and has
been selected in 30 under 30 by
Forbes. She obtained her MPhil in International Affairs from Cambridge
and her BA(Hons) from York.
MARCH 2015 OIL & GAS FINANCIAL JOURNAL

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Citibank In Shanghai Adaa | Dreamstime.com

ABOUT THE AUTHOR

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UPSTREAM NEWS

BRIEFS
IRAQ SECONDLEADING
CONTRIBUTOR TO
GLOBAL OIL SUPPLY
GROWTH IN 2014
Despite some supply
disruptions and security threats, Iraq was the
second-leading contributor to global oil supply
growth in 2014, behind
only the United States.
Iraq accounted for almost 60% of production
growth among the Organization of the Petroleum
Exporting Countries
(OPEC), although this
growth was more than
offset by production
declines in other OPEC
countries. Iraqs crude oil
production, which averaged almost 3.4 million
barrels per day (bbl/d)
in 2014, was 330,000
bbl/d above 2013 levels,
despite the heightened
security threat from the
Islamic State of Iraq and
the Levant (ISIL) and
disrupted production in
northern Iraq.EIA

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HISTORIC GAINS IN US OIL PRODUCTION


MAY COME TO A HALT IN 2015 IHS
Stunning growth in US oil production may come
to a halt by mid-2015 as low oil prices begin to
constrain US tight oil production, which has been
the dominant engine of world oil supply gains in
recent years, according to a new report by information and analytics provider HIS. Growth is still
expected in the early months of 2015 but that
momentum will level off in the latter half of the
year amidst prices at lows not seen since the
2008-09 Great Recession.
The new report, based on an IHS study of
39,000 wells, points to the possibility of monthto-month US oil production growth coming to a
halt in the latter half of 2015, assuming that West
Texas Intermediate (WTI) prices remain below
$60.
The study identified a wide spectrum of breakeven prices for US crude oil production. About a
quarter of new wells in 2014 had a breakeven WTI
price of $40 or less. Just less than half of new
wells in 2014 had a breakeven price of $60 or less.
At the opposite end of the spectrum, nearly 30%
of new wells had breakeven prices of $81 or
higher. The break-even level is the WTI price
needed to cover capital and operating costs and
generate a 10% return.
Hedging programs, finishing work on uncompleted wells, contractual obligations and further
drilling of the most economic tight oil plays mean
that many new wells will still be drilled in 2015.
But adverse economics and lower spending will
lead to fewer wells drilled than in 2014, the report
says.
Monthly average US production at the close
of 2015 is projected to be about half a million
barrels per day above the January 2015 average,
but nearly all of that growth will come in the first
half of the year. By December 2015, US oil production growth will have been flat for several months,
the report says.
US oil production has been the main engine
of global supply growth in recent years, said Jim
Burkhard, vice president, IHS Energy. And momentum from strong growth in the second half
of 2014 means the impact of lower prices will not
immediately drive production lower. But the reality
of lower oil prices and less spending on new wells
will affect production as 2015 progresses.
The fate of US oil production growth past 2015
and into 2016 will be shaped by global economic
conditions, geopolitics and changes in industry
costs, all of which are in a state of flux, according

to Raoul LeBlanc, IHS energy senior director, financial markets and report co-author.
So much can happen over the course of a
year, LeBlanc said. If oil prices remain weak and
confidence in future prices remains shaken, US
production in 2016 could possibly flatten or even
decline. But there is plenty that could happena
recovery in oil prices, lower upstream costs and
improved well productivitythat would quickly
change the calculus of drilling new wells and
reinvigorate US production growth.
WILLIAMS AND DPM ACHIEVE FIRST GAS
FROM ULTRA-DEEPWATER GOM
Williams, through its general partner ownership
of Williams Partners, with DCP Midstream Partners
LP, has achieved first gas from an ultra-deepwater
area of the Gulf of Mexico, as the new extended
Discovery natural gas gathering pipeline system
is now flowing natural gas. The Keathley Canyon
Connector deepwater gas gathering pipeline
system and the South Timbalier Block 283 junction platform are serving producers in the central
ultra-deepwater Gulf of Mexico.
The 20-inch, 209-mile Keathley Canyon Connector, which is capable of gathering more than
400 million cubic feet per day (MMcf/d) of natural
gas, originates in the southeast portion of the
Keathley Canyon protraction area and terminates
into Discoverys 30-inch-diameter mainline at
Discoverys new junction platform. The pipeline
was constructed in depths of up to 7,200 feet of
water. Williams owns the controlling interest in,
and is the general partner of, Williams Partners
LP, which owns 60% of the Discovery system and
operates it. DCP Midstream Partners LP owns the
remaining 40% of the Discovery system.
The Keathley Canyon Connector extension is
supported by long-term agreements with the
Lucius and Hadrian South owners, as well as the
Heidelberg and Hadrian North owners, for natural
gas gathering, transportation and processing
services for production from those fields. In addition to the offshore gathering system, the Discovery system includes the 600 MMcf/d Larose
natural gas processing plant providing market
outlets to six interstate/intrastate gas pipelines
and the 35,000 b/d Paradis fractionation facility.
MARATHON FURTHER REDUCES
DRILLING BUDGET
After reporting an operating loss in the final quarter of 2014, Marathon Oil Corp. plans to further
reduce its drilling budget. The company now
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UPSTREAM NEWS

plans to spend $3.5 billion on oil and gas drilling


in 2015, down from a budget of about $5.9 billion
in total capital, investment, and exploration
spending in 2014. The number is down 20% from
the guidance in December of $4.3-4.5 billion.
More than $1.4 billion in earmarked for the Eagle
Ford, where rig count is expected to drop from
18 in late 2014 to 10 by the end of the second
quarter. Included in Eagle Ford spending is approximately $1.0 billion for drilling and
completions.
The company plans to spend $760 million in
the Bakken in North Dakota. Drilling activity will
be reduced to two rigs by the end of the first
quarter, down from seven rigs at the end of 2014.
Bakken spending includes approximately $550
million for drilling, completions and
recompletions.
GCA: OIL PRICE CRASH COULD
HAVE 2MMBPD IMPACT IN US
By the end of 2016 US production could be some
two million barrels per day lower than where it
would have been without the oil price crash, according to analysis by Gaffney, Cline &
Associates.
Based on GCAs review of EIA and public data
from the Bakken, if the oil price crash had not
happened and rig count had stayed steady, then
that play would probably have added a further
500,000 to 600,000 b/d by the end of 2016. Cutting the rig count significantly takes away this
growth but doesnt cause production to fall like
a stone, said GCA executive director and senior
strategic advisor Bob George.
In its January 2015 forecast, the EIA has US
oil production continuing to rise steadily to one
million barrels per day above its 2014 year end
level, by the end 2016. The results of our work
suggest that despite the expected sharp drop in
capital expenditures and rig count, under most
scenarios production over the next two years is
not expected to drop from current levels, and
may even continue to increase, added GCA
petroleum economist Cecilia Jing Cui.
However, this does reflect a sharp fall from
where it might otherwise have been. Extrapolating the Bakken production analysis to all US unconventional production would result in a difference of some 1.5 million to two million barrels of
oil per day from what might have been.
GCA senior geologist Neil Abdalla also pointed to another factor that could impact forecasts,
based upon some recent operator comments:
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OIL & GAS FINANCIAL JOURNAL

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There is also a storage scenario which involves


drilling but not completing wells straight away.
This seeks to defer flush production in the hope
of capturing a price recovery or spike. It is somewhat analogous to players who are renting tankers
to buy crude today, store it and then release it
back into the market when prices are higher. The
scenario may also explain in whole or part, the
sharp rise in oil price as players speculating in
the market also seek to drive up the futures market
and lock in early profits.
MEXICOS PEMEX WILL HALT SOME
DEEPWATER EXPLORATION PROJECTS
The head of Mexicos state-run oil company Pemex said Feb. 18 that the company will delay
starting some much-anticipated deepwater exploration projects due to the decline in worldwide
crude oil prices.
Pemex managing director Emilio Lozoya said
the company plans personnel cutbacks in the
coming weeks, although no specific numbers
were provided.
Recently, the company noted it would reduce
2015 expenditures by about $4.2 billion. The
Mexican government has opened up bidding on
Round 1 of projects open to outside investment,
and Lozoya said it will go ahead this year as
planned.
According to Mexican officials, approximately
24 outside companies, including US majors ExxonMobil and Chevron, have expressed interest
in 14 shallow-water blocks available in Round 1.

BR I EF S
STATOIL,
PARTNERS SUBMIT
DEVELOPMENT
PLAN FOR JOHAN
SVERDRUP
Statoil and its partners
have submitted the plan
for development and
operation for Johan
Sverdrup, Phase 1, to the
Norwegian Ministry of
Petroleum and Energy.
Capital expenditures for
Phase 1 are estimated
at NOK 117 billion (2015
value) and the expected
recoverable resources
are projected at between
1.42.4 boe. The development in Phase 1 has
a production capacity
in the range of 315,000
380,000 b/d and first oil
is planned for late 2019.

FIRST OIL FLOWS AT UAES


OFFSHORE NASR FIELD
Through its wholly-owned subsidiary Japan Oil
Development Co. Ltd. (JODCO), Japans Inpex
Corp. has commenced oil production from the
Nasr Oil Field offshore Abu Dhabi, the United
Arab Emirates in late January.
The Nasr Oil Field is located approximately
81 miles northwest of Abu Dhabi City. Inpex has
jointly developed the Nasr Oil Field with Abu
Dhabi National Oil Company (ADNOC), BP, and
Total.
In the first development phase, Inpex has commenced oil production from the Nasr Oil Field
by utilizing existing facilities of the Abu Al Bukoosh (ABK) and Umm Shaif Oil Fields, located
adjacent to the Nasr Oil Field. Full field development of the Nasr Oil Field is currently in progress,
and after completion, the field is expected to
produce oil at a peak rate of 65,000 b/d.
11

3/3/15 3:39 PM

MIDSTREAM NEWS

BRIEFS
VENTURE GLOBAL
LNG RAISES
$125M IN EQUITY
FINANCING
Venture Global LNG Inc.
has closed two rounds
of equity investment
bringing Venture Global
to an aggregate of $125
million in new capital.
The proceeds from the
equity investments will
fund the development of
LNG export facilities in
the US, including Venture
Globals Calcasieu Pass
project in Cameron Parish, Louisiana.
WILLIAMS PARTNERS,
CRESTWOOD
COMMISSION
NIOBRARA PLANT
Williams Partners LP and
Crestwood Midstream
Partners LP have commissioned the Bucking
Horse gas processing
facility in Converse
County, Wyoming,
adding 120 MMcf/d of
processing capacity in
the Powder River Basin
Niobrara shale play. The
Bucking Horse plant,
along with the Jackalope
Gas Gathering System, is
owned through a 50/50
joint venture between
Williams Partners and
Crestwood Midstream
Partners.

12

1503ogfj_12 12

PHILLIPS 66 PARTNERS TO ACQUIRE $1B


EQUITY INTERESTS IN PIPELINE SYSTEMS
Phillips 66 Partners LP has reached an agreement
with Phillips 66 to acquire Phillips 66s interests
in three pipeline systems.
The acquisition includes one-third equity interests in the limited liability companies that respectively own the Sand Hills and Southern Hills
natural gas liquids (NGL) pipeline systems, and
a 19.46% equity interest in Explorer Pipeline Co.,
the owner of the Explorer refined products pipeline system. In exchange, Phillips 66 will receive
total consideration of $1.01 billion consisting of
$880 million in cash and 1,726,914 newly issued
PSXP units, to be allocated between common
units and general partner units in a proportion
allowing the general partner to maintain its 2%
general partner interest.
The total transaction value, including approximately $65 million of proportional non-consolidated debt of Explorer Pipeline Co., reflects an
approximate 9.5 times multiple of the forecasted
full-year 2015 earnings before interest, taxes,
depreciation, and amortization (EBITDA) of $115
million attributable to these equity interests.
The transaction includes Phillips 66s equity
interests in entities holding the following
assets:
Sand Hills NGL Pipeline System: A 720-mile
NGL pipeline system that provides takeaway
service from DCP Midstream and third-party
plants in the Permian and the Eagle Ford basins
to fractionation facilities along the Texas Gulf
Coast and the Mont Belvieu, Texas, market hub.
The system has a capacity of 200,000 b/d and is
expandable up to 350,000 b/d with additional
pumping stations.
Southern Hills NGL Pipeline System:An 800mile NGL pipeline system that provides takeaway
service from DCP Midstream and third-party
plants in the Midcontinent to fractionation facilities along the Texas Gulf Coast and the Mont
Belvieu, Texas, market hub. The system has a
capacity of 175,000 b/d.
A 1,830-mile refined products pipeline system
that provides connectivity to refineries and market
centers from the Gulf Coast to the Midwest. The
system has a capacity of 660,000 b/d.
The transaction is expected to be immediately
accretive to the Partnership and its unitholders,
and is anticipated to close in early March. The
Conflicts Committee engaged Evercore Partners
to act as its financial advisor and Vinson & Elkins
LLP to act as its legal counsel.

KINDER MORGAN TO BUY TERMINALS,


UNDEVELOPED SITE FOR $158M
Kinder Morgan Inc. plans to purchase three terminals
and one undeveloped site from Royal Vopak for
$158 million.
The acquisition covers a 36-acre, 1,069,500-barrel
storage complex at Galena Park, Texas, that handles
base oils, biodiesel and crude oil, immediately
adjacent to Kinder Morgans Galena Park terminal
complex; two Vopak terminals in North Carolina
including a terminal in North Wilmington that
handles chemicals and black oil, and another terminal in South Wilmington that is not currently
operating; and an undeveloped site at Perth Amboy,
New Jersey, with waterfront access that can be
developed.
The transaction is expected to close during the
first quarter of 2015.
CANYON MIDSTREAM BEGINS JAMES LAKE
SYSTEM OPERATIONS IN PERMIAN
Canyon Midstream Partners LLC has began commercial operations of its James Lake Midstream
System in the Permian Basin.
Phase I of the James Lake system consists of a
105-MMcf/d cryogenic gas processing plant in Ector
County, Texas, and six field compressor stations; 60
miles of 12-inch trunkline; and 20 miles of lowpressure gathering lines in Ector and Andrews counties, Texas.
Phase II of the James Lake system will add a
second cryogenic gas processing plant, with a capacity of 100 MMcf/d, in Andrews County, and
additional trunkline to expand the systems service
territory into Lea County, New Mexico, and Martin
and Howard counties, Texas. Canyon expects Phase
II to begin operations in the first half of 2016.
ENLINK ACQUIRES CORONADO
MIDSTREAM FOR $600M
The EnLink Midstream companies, EnLink Midstream Partners LP (the partnership) and EnLink
Midstream LLC (the general partner), have agreed
to acquire Coronado Midstream Holdings LLC,
which owns natural gas gathering and processing
facilities in the Permian Basin, for approximately
$600 million, subject to certain adjustments.
The acquisition includes natural-gas gathering
and processing facilities in the Permian Basin and
will expand Enlinks presence in West Texas. Under
the deal, Coronados owners will receive $240 million
in cash, $180 million of EnLink Midstream Partners
common units and $180 million of a new class of
EnLink Midstream Partners common units.
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OIL & GAS FINANCIAL JOURNAL

MARCH 2015

3/3/15 3:39 PM

MIDSTREAM NEWS

Coronado operates three cryogenic gas processing plants and a gas gathering system in the North
Midland Basin including 270 miles of gathering
pipelines, 175 MMcf/d of processing capacity, and
35,000 horsepower of compression. Construction
of an additional 100 MMcf/d of processing capacity
and gathering system expansions of the Coronado
system are under way. The system has current inlet
volumes of 100 MMcf/d. EnLink plans to connect
the Coronado system with its Bearkat system to
create a multi-county rich-gas gathering and processing system.
Baker Botts provided counsel to EnLink Midstream Partners in connection with the acquisition.
Sidley Austin LLP provided counsel to Coronado
Midstream Holdings LLC.

PAA TO CONSTRUCT TWO NEW


DELAWARE BASIN PIPELINES
Plains All American Pipeline LP plans to construct
two new Delaware Basin pipelines and related gathering systems, to expand its existing Blacktip station
and to construct a 20-inch loop line from Blacktip
station to Wink, Texas.
These new infrastructure builds in West Texas
and New Mexico will support PAAs 24-inch Basin
Pipeline loop from Wink to Midland, Texas, and
new 12-inch pipeline from Monahans, Texas, to
Crane, Texas. The new Delaware Basin pipelines,
Avalon Extension and State Line, are backed by
producer commitments.
The 32-mile, 12-inch Avalon Extension pipeline
will extend the Avalon pipeline, which runs from
the PAA Avalon station in northwest Loving County
to its Blacktip station in southeast Loving County,
Texas, into Culberson County, Texas, and is capable
of transporting up to 100,000 barrels per day (bpd)
of crude oil from northern Loving and Culberson
counties. The line and two new truck unloading
facilities at Orla, Texas, and at Highway 285 are
expected to be brought into service in phases beginning in July, with total system completion, including the associated gathering system, scheduled for
September.
The 60-mile, 16-inch State Line pipeline will connect Culberson County to Wink, running along the
TexasNew Mexico state line. The State Line pipeline will connect Delaware Basin production in
southern Eddy and Lea counties in New Mexico
and in northern Loving, Reeves, and Culberson
counties in Texas to the existing network of PAA
Permian Basin assets. The pipeline will be able to
transport up to 150,000 bpd of batched crude oil
and condensate. The State Line pipeline is expected
MARCH 2015

1503ogfj_13 13

OIL & GAS FINANCIAL JOURNAL

WWW.OGFJ.COM

to be brought into service in phases beginning in


early 2016 and concluding in mid-2016, with completion of the associated gathering system anticipated
by early 2016.
The Blacktip station expansion and pipeline loop
will include building 200,000 barrels of new operational tankage and associated pumping to provide
an additional 200,000 bpd of pipeline capacity from
the Blacktip station to Wink. The Blacktip station
expansion and loop pipeline are expected to be
completed in August.
NGL TO UPSIZE GRAND MESA SYSTEM
NGL Energy Partners LPhas decided to increase
the size of its 100% owned Grand Mesa Pipeline
system to a higher-capacity 20-inch design.
The decision to expand was based on initial shipper commitments and additional volumes committed
to Rimrock Midstream LLCs 150-mile Denver-Julesburg Basin gathering system that is under development and will tie into Grand Mesa Pipeline system
at Lucerne, Colorado. The larger pipeline provides
area producers an option out of the basin capable
of transporting over 200,000 barrels per day.
The Grand Mesa Pipeline system will include
over 550 miles of new crude oil transportation pipeline, multiple truck injection bays, over one million
barrels of operational storage, and at least two
origination points located near Lucerne and Kersey
(Riverside Station) in Weld County, Colorado.
The system is scheduled to begin service in the
fourth quarter of 2016. Rimrock will construct and
operate the pipeline system.
SANTA FE MIDSTREAM PARTNERS WITH
ENERGY SPECTRUM CAPITAL
Santa Fe Midstream LLC has formed a partnership
with Energy Spectrum Capital to initially invest up
to $150 million of equity to pursue midstream opportunities across the US.
The Santa Fe Midstream management team
includes Greg Kegin, CEO; Amer Rathore, founder;
Clay Gordon, vice president commercial; and Paul
Dolan, vice president engineering.
Prior to Santa Fes formation in late 2014, Kegin
served as director of business development for
Chesapeake Midstream and Access Midstream.
Rathore is one of four founding partners of Santa
Fe Midstream. He has over 30 years of experience
in both the power and natural gas industries. Gordon
most recently served as manager of business development at Chesapeake Midstream and Access
Midstream. Dolan most recently served as director
of infrastructure services for WPX Energy.

BR I EF S
DCP MIDSTREAM
REDUCES
WORKFORCE BY 20%
Denver, CO-based
DCP Midstream has
reduced its workforce
by approximately 20%.
In a statement, the company called the move a
corporate restructuring
resulting in the closing of
the companys Oklahoma
City regional office, as
well as a headcount
reduction in the Tulsa
and Midland offices.
Functions of those locations would be moved
primarily to its Denver
headquarters and Houston regional office.
NISOURCE FILES FOR
CPG SEPARATION
NiSource Inc. has filed an
initial Form 10 registration statement with
the US Securities and
Exchange Commission
(SEC) in connection with
the companys plan to
separate its natural gas
pipeline and related
businesses into a standalone publicly traded
company, known as
Columbia Pipeline Group
(CPG), in mid-2015.

13

3/3/15 3:39 PM

Impact of oil prices on investors


ANALYZING THE SENSITIVITY OF INVESTMENT AND PRODUCTION LEVELS AT DIFFERENT PRICES
PER MAGNUS NYSVEEN AND LESLIE WEI, RYSTAD ENERGY

14

1503ogfj_14 14

F1: TOTAL NORTH AMERICAN SHALE INVESTMENTS


180
160
140
USD billions

examined the impact of $70/bbl oil prices


to the production and investment levels
for North American unconventional activity. Since then, the WTI oil price has fluctuated from $60/bbl in December to around
$40/bbl in January and back to $50/bbl in
February. In the current uncertain environment, price forecasts are hard to estimate,
therefore it is important to analyze the
sensitivity of investment and production
levels at different price levels.
Compared to other sources of investments, shale activity is particularly flexible.
At lower prices, operators can focus on core
areas and decrease rig counts. BHP Billiton,
for example, plans to decrease its 2015 onshore US rig count by 40% and drill mainly
in its Eagle Ford acreage. This level of flexibility is not available for other types of
projects, especially offshore, where project
start-up has a long lead time.
On the macro level, rig activity was at a
peak of over 2,000 rigs in October 2014 and
has since dropped to ~1,500 as of the last
week of January. In addition to decreasing
rig counts, operators also have the option
to delay completions until prices increase.
Antero Resources reported in January that
it plans to defer completions during the
second and third quarters of 2015. This
action reduces the capital spending during
times of strained cash flow and allows for
quick response in production once prices
increase.
Figure 1 shows the shale investments
going forward split by different wellhead
break-even categories. The wellhead breakeven price is the wellhead oil price used to
obtain an NPV of zero. In the previous edition of the article, we assumed an oil price
of $70/bbl going forward. This led to a ~15%
drop in activity levels year over year from
2014 to 2015. If we assume a lower oil price
of ~$50/bbl, the decrease in spending is
then ~30%.
While investment levels show very
strong reactions to the market, the resulting

120
100
80
60
40
20
0

Historical

2010

2011

Gas wells

<40

2012
40-50

2013
50-60

2014

60-70

70-80

2015
80-90

2016
90-100

>100

Source: Rystad Energy NASCube

F2: PRODUCTION FOR THE TOP FOUR PLAYS


4.5
4
3.5
3
MMboe/d

IN THE FEBRUARY ISSUE OF OGFJ, we

2.5
2
1.5
1
0.5
0

14 14 14 14 14 14 14 14 14 14 14 14 15 15 15 15 15 15 15 15 15 15 15 15
n- b- r- r- y- n- y- g- t- t- v- c- n- b- r- r- y- n- y- g- t- t- v- cJa Fe Ma Ap Ma Ju Jul Au Sep Oc No De Ja Fe Ma Ap Ma Ju Jul Au Sep Oc No De

Eagle Ford

Bakken

Permian

Niobrara

Note: Forecasted values based on 30% rig reduction since December 2014, figures do not account
for possible delays in completion.
Source: Rystad Energy NAS WellData

effect on production is limited.


Figure 2 shows the total production from the four largest shale plays: the Eagle Ford,
Bakken, Permian, and Niobrara. The historical values are based on officially reported well
data, and the forecasted values are based on assuming a further 20% to 30% rig reduction
compared to December 2014.
In 2014, production volumes increased 19% and 16% during the first and second half
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3/3/15 3:40 PM

While investment levels show very strong reactions to the market, the resulting effect on production is limited.

of the year, respectively. In 2015, it is estimated that the production


will continue to increase 9% during the first half of the year and
taper off to 3% during the second half of the year.
The robust nature of the production can be attributed to the
fact that companies will pull out of their less prospective areas first
and maintain or even increase rigs in their most prospective areas.
In addition, vertical rigs have experienced the largest decrease in
rig counts, with nearly a 50% reduction since October 2014.
Since vertical wells are less productive than horizontal wells,
the overall effect of dropping a vertical rig is smaller than dropping
a horizontal rig. Lastly, there is also an average four- to six-month
delay between drilling and completion. Therefore, wells that were
drilled during the second half of 2014 will come online in 2015, and
the effect of fewer wells being drilled will be more obvious in 2016.
The profitability of shale activity varies between different areas
in a play depending on the combination of geologic factors (depth,
thickness, thermal maturity). Hence, the economics of the wells
also vary from less than $40/bbl to more than $100/bbl.
With lower oil prices, activity will be concentrated in the best
areas, and the rig count in less prospective areas will decrease.
Even if rigs decreased an additional 30% compared to December

2014 levels, production will remain steady through the remainder


of the year.
ABOUT THE AUTHORS

Per Magnus Nysveen is senior partner and head of


analysis for Rystad Energy. He joined the company
in 2004. He is responsible for valuation analysis of
unconventional activities and is in charge of the
North American Shale Analysis. Nysveen has developed comprehensive models for production
profile estimations and financial modeling for oil and gas fields.
He has 20 years of experience within risk management and financial analysis, primarily from DNV. He holds an MSc degree
from the Norwegian University of Science and Technology and
an MBA from INSEAD in France.
Leslie Wei is an analyst at Rystad Energy. Her main
responsibility is analysis of unconventional activities in North America. She holds an MA in Economics from the UC Santa Barbara and a BA in Economics from the Pennsylvania State University.

 
     
 
 
  

We are currently looking to acquire


oil and natural gas assets in the
following areas:

  
  

  

  
  

We are also seeking additional leasing


opportunities in Texas and Oklahoma
 




Trusted Operator
& Capital Provider
for over 30 Years

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We Will Work With You! Call Us Today:
800.636.7606 x 238

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15

3/3/15 3:40 PM

AN INTERVIEW WITH MACQUARIE

Macquarie experts scrutinize industry


FIRM SEES OPPORTUNITIES IN CURRENT LOW-PRICE ENVIRONMENT
DON STOWERS, EDITOR OGFJ

EDITORS NOTE: Headquartered in Sydney, Macquarie is Australias largest investment bank. OGFJ recently spoke with four
senior officials with Macquarie Nick OKane, Head of Energy
Markets; Paul Beck, Head of Upstream Capital; Nick Butcher,
Head of Americas Infrastructure and US Energy; and Nicholas
Gole, Head of Energy and Infrastructure Financing. We were
able to get the four busy executives together in Houston for a
group photo and to talk with us about Macquarie and its place
in the energy sector.

OIL & GAS FINANCIAL JOURNAL: Thank you all for taking
the time to speak with us. First, let me ask you how the current low price environment has affected Macquaries energy
business. Have some groups been affected negatively while
others are actually seeing a bump in activity?

NICK OKANE: Shifts in market environments create opportunities for our business. The shale gas revolution in North America, for example, dramatically shifted the landscape for the US
natural gas market. We were able to identify early that exporting
LNG would be attractive as a result of these changes, and were
able to work with Freeport LNG to take advantage of this
opportunity.
The lower oil price environment has already begun to alter
the supply and demand dynamics in that market. Some producers are becoming stressed, increasing the need for structured
financing solutions. Other projects are becoming more attractive, which results in new customers looking for the products
and services which we provide. Our business is well positioned
to capitalize on opportunities such as these as the market
continues to change.

PAUL BECK: Without a doubt, the precipitous drop in oil prices


and lets not forget gas prices are off quite a bit of late too
has resulted in most development drilling in the US being
marginally economic at best. This has put a damper on our
traditional project finance prospects. On the other hand, there
has been a huge flight of public markets capital away from the
industry of late. This has presented us with numerous refinance
and second lien/stretch debt opportunities.
We believe, once prices settle down a bit, companies will
start transacting again and there should be quite a bit of M&A
activity that will lead to attractive finance opportunities. Additionally, we are already seeing some relief in capital costs that
should result in more drilling activity soon.
16

1503ogfj_16 16

ALL PHOTOS BY SYLVESTER GARZA

As a large international bank that is in multiple industries around the globe, is Macquarie better insulated against
a down market than certain regional banks that focus mainly
on oil and gas?
NICK BUTCHER: As a diversified financial institution, our
breadth of expertise is very broad, including investment banking, advisory and capital markets, trading and hedging, funds
management, asset finance, financing, securities, and research.
In the investment bank in addition to the global energy and
commodities sectors, we have a range of sector specializations
that include infrastructure, utilities and renewables, industrial
companies, financial institutions, real estate, telecommunications, media and technology and gaming
We are also diversified by geography weve 28 offices around
the world and the diversity of our operations, combined with
a strong capital position and robust risk management framework, have contributed to our firms 45-year record of unbroken
profitability.

OKANE: From an energy markets perspective, we are in the


business of providing a range of products and services to customers with exposure to energy commodities rather than taking
large directional bets on price movements. In a volatile environment, these products become even more important to our
customers because they allow them to meet needs such as
managing their risks and financing their businesses. Historically,
we have been able to benefit from periods of volatility and grow
our business, either organically or via acquisition.
Macquaries energy trading operation is impressive.
You are ranked as the third largest trader of natural gas in
North America, behind only BP and Shell. Could you give
our readers a brief overview of what Macquarie trades and
how many traders you have? Is this your only energy trading
floor, or is energy trading activity going on elsewhere as well?

OKANE: The firm participates in markets covering all major


energy commodities, including oil and refined products, natural
gas, and power. We have more than 275 front-office employees,
many of whom have specialized expertise in areas such as
meteorology, engineering, and logistics. We have a global presence, spanning 10 offices with major hubs in Houston, London,
and Singapore.
This business is obviously seeing a lot of activity and
changes in the energy landscape, due in part to the developWWW.OGFJ.COM |

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AN INTERVIEW WITH MACQUARIE

In an uncertain price environment, adequate risk


management can make or break a project, or even
a company. Our product offerings allow clients
to protect themselves from risks inherent in these
industries, and our physical capability allows us to
structure solutions in unique ways that are ideal for
energy-exposed clients. Nick OKane

In the current price environment, the financings


that we find are good fits for us may include a whole
or partial refinancing of corporate debt coupled
with a commitment for further drilling. Or it may be
a simple development drilling project with a company that has otherwise become capital constrained.
This may be funded through a project debt or equity
structure. Paul Beck

Price downturns can create compelling consolidation opportunities for well-positioned players. Operators with strong balance sheets, ample liquidity,
and hedged production are positioned to emerge
from the downturn with enhanced scale, improved
operating cost structure and higher-quality assets.
Conversely, highly levered companies with inadequate liquidity will struggle to survive.
Nick Butcher

We worked side by side with Freeport LNG to help


provide a comprehensive solution for the companys
$11 billion terminal located in Quintana Island [south
of Houston in Brazoria County, Texas]. Construction
has begun on this project, and it is expected to be
in commercial operation in 2018. Nicholas Gole

MARCH 2015

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OIL & GAS FINANCIAL JOURNAL

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17

3/3/15 3:40 PM

AN INTERVIEW WITH MACQUARIE

ment of new drilling technologies and completion techniques


in tight oil and gas plays. Oil and gas markets are known for
their volatility. What does this mean for clients and managing their risk?
OKANE: In an uncertain price environment, adequate risk
management can make or break a project, or even a company.
Our product offerings allow clients to protect themselves from
risks inherent in these industries, and our physical capability
allows us to structure solutions in unique ways that are ideal
for energy exposed clients.

BECK: We hedge as much of the price risk as we can in most


of our project finance and stretch debt transactions. That has
hugely benefitted our clients of late.
Paul, you are responsible for the firms balance sheet
with respect to its upstream capital activities. Your group,
Energy Capital, is a provider of debt and equity capital to
energy and resources firms globally. Talk to us a little about
what you do in the E&P sector and how this has changed in
the last six months or so due to the steep decline in oil
prices.
BECK: We provide capital up and down oil and gas companies
balance sheets from traditional senior reserve-base loans to
both public and private equity. The foundation of our effort
comes from our technical staff with 16 petroleum reservoir
engineers, geologists, and techs in our worldwide group (offices
in Houston, Calgary, London, Sydney, and Singapore). This gives
us the ability and confidence to fund capital into riskier projects
than most banks would not find attractive from a risk-reward
perspective basically, projects that have a high dependency
on development drilling. In the current price environment, the
financings that we find are good fits for us may include a whole
or partial refinancing of corporate debt coupled with a commitment for further drilling. Or it may be a simple development
drilling project with a company that has otherwise become
capital constrained. This may be funded through a project debt
or equity structure.

Are the global capital markets significantly different


than those in the US, and to what extent are they are impacted
by the general economy?
BUTCHER: The recent commodity price volatility has shifted
the mentality of both issuers and investors in the US capital
markets. Last year we saw many E&P IPOs at valuations reflecting the then commodity price outlook while others accessed
high yield debt markets to fund acquisitions and exploration
activity.
However, E&P operators have been cautious in the recent
commodity price environment, reducing capex budgets to
match operating cash flows and selectively accessing capital
18

1503ogfj_18 18

markets to enhance liquidity and balance sheet availability.


With a range of views on valuation, the sector remains volatile
but active. Moving forward, we anticipate operators to opportunistically access capital markets with clear use of proceeds
to selectively enhance liquidity, pre-fund 2015 drilling capex
needs and provide acquisition financing.
In general, how would you describe credit availability
at this time? Have the qualifications tightened
significantly?
BECK: I believe credit availability has decreased, but not necessarily due to a tightening of qualifications, but more a result of
low commodity prices feeding into the financing equation.
Most credit providers are looking for coverage and return both
negatively affected by low oil and gas prices. Offsetting this to
some extent will be lower costs. Additionally, during this low
price period, some capital providers may be willing to bet some
of their return on a price recovery, but I wouldnt expect anyone
will assume a price recovery is necessary to get their principal
investment back.

Is the midstream sector somewhat immune to the


difficulties caused by low commodity prices? After all, production in North America continues to increase even as
prices decline, so midstream operations must still be going
full bore building pipelines, gathering lines, processing plants,
etc.

NICHOLAS GOLE: Midstream investors are somewhat insulated


from swings in commodity prices. However, in recent years we
have seen a shift towards acreage dedication contracts, rather
than minimum volume commitments, so investors are exposed
to production levels in the region. As a result, midstream investment in core producing areas with existing volumes should be
fairly insulated from the current commodity price environment,
whereas midstream players that have recently invested in buildout strategies for more marginal plays will be more heavily
impacted.
In light of activity in the midstream sector, has the firm
increased its resourcing in this space?

BUTCHER: Midstream is a key practice area for us on the investment banking side, and we continue to invest in the business.
Weve a broad offering including M&A, project finance advisory,
capital markets, and principal capital. Market activity remains
high in the sector and our team is very active across a number
of deals.
GOLE: Despite the recent decline in commodity prices, we continue to expand in the energy infrastructure sector as demonstrated through our continued hiring efforts as well as my own
recent relocation from New York to Houston. The goal here has
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You get good


at doing

There is a process to everything we do and it starts with identifying the


right questions and the important place to begin. Knowing where to start
and what to ask comes from experience and discipline of thought. This is
just the beginning of what we provide to our clients.
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1503ogfj_19 19

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AN INTERVIEW WITH MACQUARIE

been to increase our focus on the energy infrastructure space. In


particular, our success in the Freeport LNG transaction has led
to transaction activity on a number of other LNG projects.

What is the role of private investment in midstream


in todays low-price environment?

BUTCHER: There are significant amounts of private capital


looking to deploy in the midstream and energy infrastructure
space. We have deep relationships with many pension funds,
insurance companies, and infrastructure funds globally, and
we are actively working with them to evaluate the best investment opportunities available in the current environment.
One interesting trend were seeing increasingly is upstream E&P
companies looking to bring private infrastructure capital into their
midstream assets for liquidity or to fund expansion capex. Were
working on a number of situations like this at the moment.
Does Macquarie provide any other forms of financing
to industry participants?

GOLE: Macquarie has a merchant-banking model, in that we can


provide a very flexible range of financing solutions to clients to
help facilitate transactions. For example, various parts of the firm
can provide equity, mezzanine, or senior financing to help clients
in a range of situations. But importantly, we can also provide
development capital to support clients taking on new projects.

OKANE: Macquaries range of capabilities also allows us to


provide less traditional sources of structured financing to customers. For example, our ability to trade in physical commodities
markets allow us to do things such as financing crude inventories
for a refinery, or financing gas in a pipeline until such time as
it is needed by a utility.
Natural gas producers have been looking forward a
long while to the prospect of being able to export gas in the
form of LNG in order to take advantage of higher commodity
prices outside North America. Can you talk a little about
Macquaries involvement in LNG export projects and the
timetable for exports to commence? On the regulatory side,
is permitting still too slow? Any sign this will improve?

OKANE: We identified early that exporting LNG would be attractive as a result of the changing market landscape where
supply and demand regions have dramatically shifted as a result
of shale gas. Our longstanding relationship with Freeport LNG
is one example of where we were able to help a client take advantage of this opportunity.

GOLE: We worked side by side with Freeport LNG to help


provide a comprehensive solution for the companys $11 billion
terminal located in Quintana Island [south of Houston in Brazoria County, Texas]. Construction has begun on this project,
20

1503ogfj_20 20

and it is expected to be in commercial operation in 2018.


In addition to the terminals under construction, there are a
number of LNG export projects being discussed. But we anticipate only a handful of these will commence construction in the
next few years. The outcome will be largely based on the ability
of projects to obtain commercial agreements to support financing, as opposed to any fundamental regulatory hurdles.
One of these projects is Jordan Cove LNG, which we are
advising on the development of an LNG export terminal in Coos
Bay, Oregon.
From a macro perspective, who will be the winners
and losers from the current downturn? What trends in
M&D&D do you expect to see?
BUTCHER: While commodity price downturns are a headwind
to E&P earnings, they can create compelling consolidation
opportunities for well-positioned players. Operators with strong
balance sheets, ample liquidity, and hedged production are
positioned to emerge from the downturn with enhanced scale,
improved operating cost structure and higher-quality assets.
Conversely, highly levered companies with inadequate liquidity will struggle to survive in a persistently low commodity price
environment. E&P producers that have recently accessed debt
capital to fund largely undeveloped acquisitions may struggle
to meet obligations and honor drilling commitments, and ultimately may not be able to hold newly acquired positions,
which would drive motivated divestiture activity.
For the short term, we expect A&D transaction volume to
decrease significantly given the near-term uncertainty in commodity prices. The bid/ask between buyers and sellers will likely
remain wide until commodity prices stabilize. If prices stay down
through the second quarter, we expect to see transaction activity
pick up as companies look to adjust to lower borrowing bases.

If low prices continue through 2015 and beyond, how


do you expect the overall composite of operators and participants to evolve? Will we see a major shake-out in the
industry? Please describe the scenario you envision.

BUTCHER: We expect to see accelerated consolidation within


the industry as small/mid cap names seek an exit via corporate
M&A. Consolidation will likely include stock-for-stock deals,
as well-capitalized mid/large caps opportunistically consolidate
small/mid cap names seeking production and reserve growth,
cost savings, and high-graded drilling activity via enhanced
scale. We anticipate private equity sponsors to opportunistically
target over-levered or non-core asset divestitures by strategics,
providing a constructive outlet for funds raised by financial
sponsors over the previous few years.
Additionally, we see a continuing change in the buyer landscape. The amount of private capital available in the oil and gas
industry has continued to increase in recent years, becoming
a significant portion of the market for assets. At the same time,
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AN INTERVIEW WITH MACQUARIE

Macquaries Paul Beck (right) confers with Janet Dietrich and Ozzie Pagan in the Houston office.

low commodity prices will put pressure on public companies


and MLPs ability to finance acquisitions. Ultimately, the landscape of the industry is highly contingent on where commodity
prices stabilize. However, we believe a small number of wellcapitalized operators are clear winners and are well poised to
act as consolidators in the industry.
OKANE: In the refinery sector specifically, increasing capacity
in Asia is already shifting demand centers for crude. A continued
low price environment would result in a fundamental shift in
production regions, further altering the global flow of
products.

How is Macquarie positioning itself across the value


chain as a result of the market volatility?
OKANE: Our capabilities allow us to provide financial, physical,
and structured financing solutions customized to each customers needs, whether they are in distress or looking to take
advantage of the current market conditions. Our global coverage
is critical to our being able to capitalize on opportunities across
markets and geographies as they arise.
MARCH 2015

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Can you compare and contrast the current market


conditions including M&A&D activity to the low-price
environment in 2008-2009?
BUTCHER: Both 2008 and 2014 were record years of US onshore
E&P M&A activity followed by dramatic declines in commodity
prices. Currently, there is a very low level of activity, which is similar
to what happened in the first quarter of 2009. The key difference
that we are seeing currently is that demand for assets is much
higher than early 2009. The rapid rebound of oil prices in the
second half of 2009 made acquisitions during that time very lucrative, and there are many buyers, both strategic and private equity,
looking to capitalize on what they see as a similar situation.
Does this mean 2015 likely will see an increase in
M&A&D activity?

OKANE: Increased activity is likely in 2015, as distressed market


participants seek out structured financing or pursue asset sales.
Other participants that hedged before prices fell may be looking
to monetize those positions and reposition themselves for the
current environment, potentially through deleveraging or making strategic acquisitions.
21

3/3/15 3:40 PM

AN INTERVIEW WITH MACQUARIE

Macquarie trading
floor in Houston

BUTCHER: As prices stabilize, M&A activity will increase


though they will probably still be down on 2014 activity. Were
going to see action around distressed operators as well as
consolidation plays, and private capital looking to take advantage of the dislocation.

Which plays do you think will see the greatest level of


M&A&D activity? Drilling and completion costs are higher
in the Bakken, for example, than in some other shale plays.
Does than translate to more activity with smaller players
and over-leveraged participants forced to sell assets?
BECK: It really comes down to the economics of the specific
areas of each play. We believe the core areas of most these
shale plays still provide decent economics while areas outside
the cores are currently not economic at these prices. I wouldnt
think there will be much A&D activity in non-core areas for the
time being. And some over-leveraged companies may be forced
to sell their core acreage and production.
BUTCHER: Outside of core plays, capex reductions will focus
on lower performing assets. The focus is moving to improving
efficiencies and reducing costs in core areas. Pure play companies have been hit the hardest in the Bakken and Eagle Ford,
22

1503ogfj_22 22

but its unlikely theyll sell off core assets unless forced. The first
wave of activity is going to be non-core assets that distressed
companies can monetize while retaining their core focus areas
for reserve growth and replacement.

Ultimately, what will happen in a prolonged commodity


downturn environment?

OKANE: Lower prices persisting over the longer term would


ultimately lead to fundamental shifts to the flow of crude oil
and products around the globe, leading to declines in some
areas and increasing the need for new infrastructure and investment in others. At a macro level, lower prices could be an enabler
to future economic growth, but could also lead to unrest in
countries facing significant cutbacks as a result of lower
prices.
BECK: Its hard for me to believe commodity prices will stay
low for a prolonged period of time. Nevertheless, the US has
drilled for and produced a lot of oil and gas at prices much lower
than what we are experiencing now, and I have to believe that
wont change going forward.

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MARCH 2015

3/3/15 3:40 PM

AN INTERVIEW WITH MACQUARIE

Finally, one year from now, what do you think the


NYMEX WTI crude oil price will be? What do you think the
NYMEX Henry Hub natural gas price will be?
VIKAS DWIVEDI (Oil & Gas Strategist, Macquarie Securities):
We believe the balance of this year will be extremely volatile
with periods of sharp price rallies and equally rapid price declines. By year-end, we expect WTI prices to be approximately
$70 per barrel. We expect US crude oil inventory builds to average between 0.5 and 1.0 million barrels per day through at least
the middle of 2015. As the year progresses, annualized crude
oil production should slow from its recent 1.0 million barrels
per day rate. We expect US production growth to finally stop
growing in 2H15, and overall production may even decline
slightly by YE15. In the process, the significant global and domestic oversupply will be reduced to a more manageable level
allowing a price recovery back to the $70 range. A higher price
than $70 would be possible if not for the large domestic and
global inventory overhang that will persist into late 2015 and
even into 2016.
By YE2015, we expect the 12-month forward curve for NYMEX
natural gas to be at $3.25 per MMBTU. Our modeling indicates
that the balance of 2015 will be characterized by persistent
oversupply resulting from continued production growth that
MARCH 2015

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OIL & GAS FINANCIAL JOURNAL

WWW.OGFJ.COM

has not been slowed by low prices, slow demand growth, and
even logistical constraints. While we do expect significant
demand growth, beginning in 2016, there is very limited demand
growth in 2015 as a result of new projects startup schedules. In
fact, by the end of summer 2015, the US natural gas industry
may be facing a significant inventory problem. If natural gas
storage reaches the maximum capacity of approximately 4.2
trillion cubic feet, it will create an overhang for 2016 forward
prices that could take at least several months to work off. Our
$3.25 price expectation is anchored by our view that demand
growth in 2016 will be a source of optimism. Additionally, forward prices may be buoyed by the potential for the first deceleration of gas production growth in five years as a result of lower
wet gas drilling and lower associated gas production growth.
OKANE: It is worth reiterating that our business is not dependent
on directional moves in prices. We are a client-centric business,
and while our clients needs may change as a result of market
conditions, our range of capabilities allows us to provide valuable
products and services regardless of where prices are at.

Thank you all very much for your time.

23

3/3/15 3:40 PM

E&P Impairments looming


LOWER COMMODITY PRICES WILL IMPACT INDUSTRY THROUGHOUT 2015
JOSH SHERMAN, WADE STUBBLEFIELD, STEPHEN PATTON OPPORTUNE, HOUSTON

AFTER AN UNPRECEDENTED NUMBER

Aiksing | Dreamstime.com - Imminent Economic Crisis Photo

of initial public offerings and acquisitions


in 2014, the oil and gas industry is now
reeling from the subsequent decline in
commodity prices. As of Jan. 9, 2015, spot
crude oil and natural gas prices have respectively decreased 54% and 33% since
June 2014 and have decreased 47% and
28%, respectively, since the start of the
fourth quarter of 2014. The industry last
saw such pricing changes in 2008.
With the significant decline in commodity prices, its not just E&P companies
operations, finance and treasury functions
that find themselves having to rethink
their 2015 capital, leverage and liquidity
plans accounting teams must also refresh their understanding of the rules surrounding impairment calculations and
reporting reserves. The recent price
changes are likely to result in significant
accounting and financial reporting implications for the industry as of Dec. 31, 2014
and for each quarter in 2015.
KEY FINANCIAL REPORTING CONSIDERATIONS: IMPAIRMENTS

Successful Efforts
For companies following the Successful
Efforts method of accounting, the rules
governing impairment are specified in
ASC 932-360 and ASC 360-10. Note that
these rules are very different from all
depletion calculations and the Full Cost
ceiling-test.1
The Successful Efforts impairment calculation is a two-part test requiring further
evaluation if reserves undiscounted cash
flows are less than book value (Step 1), in
which case, an impairment is calculated
by comparing the reserves book value to
their fair value (Step 2, discounted cash
flows). Unlike a depletion calculation, a
Successful Efforts impairment test requires cash flows to be valued using a
24

1503ogfj_24 24

forward market strip price curve and a companys credit-adjusted market discount
rate as of the measurement date (e.g., quarter- or year-end).
The cash flows should consider proved reserves as well as risk-adjusted probable
and possible reserves based on the companys development plans. The estimates
and development plans utilized in such determination should be reasonable in relation to the assumptions used by the entity for other purposes (e.g., internal budgets,
projections regarding the realization of deferred tax assets, and information communicated to the companys board of directors). Under Successful Efforts, hedgeadjusted prices are not considered. Also note that unevaluated properties should
be assessed on a property-by-property basis, and if not practical, companies should
assess in the aggregate or by groups.
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1503ogfj_25 25

3/3/15 3:40 PM

Full Cost
For companies following the Full Cost method
of accounting, the ceiling test under Rule
4-10 of SEC Regulation S-X specifies that
evaluated properties capitalized costs, less
accumulated amortization and related deferred income taxes (the Full Cost Pool),
should be compared to a formulaic limitation
(the Ceiling) each quarter.
The Ceiling is equal to the following:
present value of proved reserves estimated
future net revenues;
plus,
lower cost or estimated fair value of unproven properties included in the costs
being amortized; and cost of properties
not being amortized;
less, the book-tax differences related to,
and any NOLs generated by, oil and gas
properties currently included in the companys depletion calculation.
The reserve pricing utilized in calculating
the Ceiling is the arithmetic average of the
trailing 12 months first-of-month pricing
(SEC Pricing), which will potentially delay
impairments until prices from early 2014 rollout of the 12-month average and are replaced
with lower pricing from 2015. Cash flows must
be discounted at 10% (PV10). Hedge-adjusted pricing is only available to Full Cost companies if the derivatives were formally designated as cash flow hedges for accounting
purposes.
If the companys Full Cost Pool exceeds the
Ceiling, an impairment must be recorded.
Unevaluated properties are assessed on a
property-by-property basis, and if not practical, companies should assess in the aggregate
or by groups.

Companies may be forced to reassess the classification of


certain reserves sooner than expected as commodity prices change well economics and drilling plans. While companies have considerable latitude in what wells are included
in their capital plans, expect the SEC and independent auditors to closely monitor and question the five-year life
of PUDs and companies ability to finance such drilling.

Oil and natural gas reserves


ASC 932 stipulates publicly-traded companies apply a standard measure for
supplementally disclosing oil and gas reserve volumes and present value (the
Standardized Measure). Although the Standardized Measure requirements are
intended to provide a common reporting framework by which to compare all
public oil and gas companies, confusion may still exist among financial statement
preparers and users.
The commodity price (SEC Pricing) and discounting methodologies (PV10)
used in the Standardized Measure mirror those applied by Full Cost companies;
therefore, Successful Efforts companies may record impairments that may not
be apparent in SEC disclosures. The passing of the SEC Modernization of Oil &
Gas Reporting, effective Jan. 1, 2010 and applied for fiscal years ending or after
Dec. 31, 2009 (the SEC Modernization), also means that some current Standardized Measure rules were not in effect during the industrys previous commodity
price crisis in 2008.
In addition to SEC Pricing changing from the companys realized price as of
the balance sheet date (as compared to the arithmetic 12-month average in use
today), the SEC Modernization now requires that proved undeveloped (PUD)
reserves include only those wells that the company plans and has the financial
ability to drill within five years of the balance sheet date.
Companies may be forced to reassess the classification of certain reserves
sooner than expected as commodity prices change well economics and drilling
plans. While companies have considerable latitude in what wells are included
in their capital plans, expect the SEC and independent auditors to closely moniWTI-CRUDE OIL
160
140

REPORTING CONSIDERATIONS

120
Oil $/bbl

All other factors being equal, using forward


strip pricing rather than a historical average
may result in Successful Efforts companies
reporting impairments sooner than Full Cost
companies. Of course, not all factors are equal
and additional nuances exist within industry
reporting requirements. Industry stakeholders
should also consider the effects such differences may have on footnotes, borrowing base
determinations and managements discussion
and analysis.

100
80
60
40
20
0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Two year price strip
6/30/2008

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1/9/2009

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tor and question the five-year life of PUDs and companies


ability to finance such drilling.

Income tax ramifications


In most cases, tax law does not follow GAAP in allowing a current year tax deduction for impairments due to more stringent
rules for losses. As such, the impairment expense is often
treated as an unfavorable temporary difference in the period
recorded. The change in the deferred tax liability from this
unfavorable temporary difference should be recorded using the
marginal tax rate applicable to the book-tax basis difference in
properties (and not the estimated annual effective tax rate).
While this in and of itself does not have a direct impact on an
entitys effective tax rate, preparers of financial statements must
consider the need to record a valuation allowance at that time
if the impairment causes the (impaired) book carrying value of
the properties to exceed their (unimpaired) tax bases. The SEC
staff tends to interpret the ASC 740 literature rather conservatively in this area. The presence of a valuation allowance would
reduce the expected tax benefit to record at the time of the
impairment.
Borrowing base determinations
There are no common rules applied across all lenders and, as
default risk increases along with commodity price decreases,
it should be expected that the borrowing base inputs employed
by lenders may not be consistent from period-to-period. The
valuation inputs and methodology used in a reserve-based
borrowing base determination are more closely aligned with
the fair value metrics used in a Successful Efforts impairment
calculation, but all companies may experience downward borrowing base revisions that were not apparent from their impairment calculations and Standardized Measure disclosures. The
discount rate used by banks is almost always 9%. In addition,
the price curve used by banks is typically fairly flat and below
the current spot price. Although lenders give companies credit
for hedge pricing, note that cross-default provisions may result
in a liquidity covenant default terminating the same derivative
instruments designed to protect the company.
Managements discussion & analysis: Market & liquidity risk
disclosures
The current price environment will continue to have significant
disclosure impacts on the oil and gas industry throughout 2015
and at least the 2nd quarter of 2016, but the proper understanding, consideration and expanded disclosure of the accounting
rules will assist in eliminating reporting and liquidity
surprises.
Consider including risk disclosures within MD&A based on
an assumption that current prices persist through 2015. We
suggest describing the potential amount, timing, and probability
of the following events occurring in future periods, as well as
managements plans to remedy any liquidity or going concern
issues:
MARCH 2015

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OIL & GAS FINANCIAL JOURNAL

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ceiling-test write-downs, particularly as higher prices roll-out


of the average used to calculate SEC Prices;
material revisions to the volumes and PV10 disclosed in the
Standardized Measure;
covenant defaults and/or borrowing base adjustments;
cash flow and production risks associated with non-operated
properties;
loss of value in carried interests or other joint venture arrangements when there is a limited time to execute on properties not held by production; and
changes in time to realize a reversion in net profits or overriding royalty interests, or to repay volume-based or dollardenominated variable production payments.
NOTE: This article does not discuss the costs that may be capitalized under the Successful Efforts vs. Full Cost methods of
accounting.
ABOUT OPPORTUNE

Opportune LLP is an international energy consulting firm


specializing in assisting clients across the energy industry, including upstream, midstream, downstream, power, commodities
trading, and oilfield services. Opportunes service lines include:
complex financial reporting, corporate finance, dispute resolution, enterprise risk, outsourcing, petroleum engineering and
geosciences, process and technology, process engineering, restructuring, strategy and organization, and tax.
ABOUT THE AUTHORS

Josh Sherman is the partner in charge of Opportunes complex financial reporting group. He has
more than 16 years experience providing clients
across the energy spectrum with technical research,
capital markets, and SEC reporting assistance.
Sherman specializes in IPOs, variable interest entities, purchase price allocations, energy trading, and derivatives,
stock-based compensation and oil and gas disclosures.
Wade Stubblefield is a managing director in the
corporate finance and complex financial reporting
practices of Opportune. He has 25 years experience
in corporate finance and technical accounting with
experience across the energy spectrum (upstream,
midstream, downstream and wholesale and retail
energy trading and marketing). Stubblefield has served in a
number of industry roles from CFO to CAO and controller.

Stephen Patton is a director in Opportunes complex


financial reporting group. He has more than 12
years experience, including financial statement
and internal control audits, technical accounting,
and SEC regulations. Prior to joining Opportune,
Patton was a senior manager in the audit and enterprise risk services department at Deloitte & Touche.
27

3/3/15 3:40 PM

Will the Bakken boom go bust?


NORTH DAKOTA SHALE PLAYERS FEELING THE SQUEEZE
FROM WEAK OIL PRICES AND SAFETY REGULATIONS
BRIDGET HUNSUCKER, GENSCAPE, HOUSTON
HILLARY STEVENSON, GENSCAPE, LOUISVILLE, KY

DECLINING US OIL PRICES and new environmental and rail-

car safety regulations are expected to dampen North Dakota


Bakken Shale production in 2015, while narrow crude-by-rail
arbitrage margins may limit spot market destinations for the
crude that has become less economic for some refiners.
The Bakken shale oil boom in North Dakota produced over
1.1million barrels of oil per day by the end of 2014, according
to the North Dakota Department of Mineral Resources. But by
September 2015, Bakken rig counts are expected to decline to
an all-time low of 81, down from a high of 181 in September
2014 due in part to weaker global crude prices, according to
Genscape. In late January 2015, the Bakken rig count stood at
154. In addition, rig counts nationwide are poised to decrease
by more than 600 to 735 by September 2015.
Spot Bakken prices at North Dakota crude-by-rail terminals
decreased nearly $56/bbl to $36.10/bbl between January 2014
and January 2015. Bakken crude prices declined alongside major
28

1503ogfj_28 28

weakness in the global crude complex in 2014.


Following OPECs November 2014 meeting, crude prices fell
to less than $50/bbl and set new six-year lows for both WTI
and Brent. Citing the threat of US shale oil as a justification,
OPEC decided to maintain output levels to retain market share.
In turn, supply and demand economics pulled down the price
of crude, which may push some US shale oil plays underwater
in the long term. The most recent International Energy Agency
estimates show that shale producers will break even at $42/
bbl.
Break-even costs for operational rigs in North Dakota are
near $15/bbl, and tax exemptions may be enacted if crude costs
continue to remain depressed in order to incentivize capital
investment, the North Dakota Department of Mineral Resources
said in December 2014.
North Dakota has two tiers of tax incentives. One is for new
horizontal wells completed in a month following a month where
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3/3/15 3:40 PM

NORTH DAKOTA RAIL,


PIPELINE FACE OFF

Like Bakken prices, North Dakota crudeby-rail loading volumes have also declined, as the benchmark price spread
between Brent and WTI crudes, a leading
indicator of US crude-by-rail volumes,
narrowed. The spread tightened over $8/
bbl from January 2014 to January 2015 to
$3.73/bbl with January average rail loadings at 506,000 bpd, 55,000 bpd lower
than average rail loading volumes in January 2014, according to Genscape.
Rail volumes have decreased in part
with an increase in relatively cheaper
pipeline takeaway capacity options from
the state, including Tallgrass 230,000 bpd
Guernsey, Wyo.-to-Cushing, Okla., Pony
Express pipeline, which began operations
in October 2014, according to Tallgrass.
When Hiland Partners 50,000 bpd
Double H pipeline is operational, even
more Bakken barrels are likely to shift
from rail to pipeline. Double H is expected
to start operations in Q1 2015. Recently,
Hiland Partners and its assetsincluding
Double Hwere acquired by Kinder Morgan. The deal closed in mid-February.
Continental Resources, a large Bakken
producer, which in 2014 railed 70% to
80% of its North Dakota crude, was planning to get off the train as soon as possible, Stephen Bradley, vice president of
oil marketing said during a 2014 presentation. In preparation, the company
planned to grow its pipeline connected
barrels by 5% a year until all production
is connected, he said.
However, total rail and pipeline takeaway capacity from North Dakota already
exceeds Bakken production, which may
result in the cancelation of some planned
pipeline projects, sources said. In mid30

1503ogfj_30 30

With Brent trading very close to WTI, Cushing (Okla.) seems like the
best market for Bakken crude now. It would be better to send it there
by pipeline than rail, but if you have a bunch of rail-cars and a terminal, then I guess it makes sense. Sandy Fielden, RBN Energy analyst

December 2014, Enterprise Products Partners announced plans to shelve its 340,000
bpd North Dakota-to-Cushing Bakken pipeline, citing that they had too few committed
shippers. Other pipeline projects, including Energy Transfer Partners 450,000 bpd
North Dakota-to-Illinois pipeline and Enbridges 225,000 bpd Sandpiper pipeline,
remain slated for completion in 2017.
CHANGING CRUDE-BY-RAIL OPTIONS

Crude-by-rail emerged in 2008 as a way to send growing supplies of relatively cheap,


light sweet Bakken crude to destination markets ahead of available pipeline capacity.
At that time, crude-by-rail arbitrage economics were favorable for many shippers, and
investors quickly built crude-by-rail loading infrastructure to catch up with production. Bakken was first railed to the US Gulf Coast, but as production increased from
the nearby Permian Basin and Eagle Ford shale plays, additional Bakken barrels were
routed to the US East Coast. There, infrastructure was quickly developed to receive
unit trains of Bakken and other crudes. US West Coast refiners are also seeking railed
Bakken barrels, but are facing environmental permitting delays for unloading
facilities.
In recent months, changes in crude-by-rail volumes unloaded at destination markets were observed as the Brent-WTI spread narrowed and pipeline transportation
options increased. For example, crude-by-rail shipments to EOGs Stroud, Okla.,
terminal resumed in January 2015 for the first time in two months, while stocks increased at Cushing because of WTIs step contango price structure. Barrels delivered
to Stroud are moved to Cushing, the basis for NYMEX light sweet oil contract, namely
WTI, via EOGs 90,000 bpd Hawthorn pipeline.
EOG Resources was an early participant in the Bakken boom, sending its first rail
shipment to Stroud in late 2009 from its Stanley, ND,loading terminal. EOG began
constructing the loading facilities in Stanley, the facilities in Stroud, and the Hawthorn
F1: BAKKEN TRANSPORTATION FLOWS YEAR OVER YEAR
700,000
600,000
500,000
bpd

the average price of West Texas Intermediate falls below $57.50/bbl. The second,
broader tier tax incentive would take
effect if the average price of WTI remains
at or below $55.09/bbl for five consecutive
months and applies to all wells for the
first 24 months in production. Should
both of these price thresholds be met,
North Dakota could face tax revenue
losses near $100 million a month.

400,000
300,000
200,000
100,000
0

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Weeks
2013 Genscape monitored rail
2013 Genscape monitored pipeline
2014 Genscape monitored rail
WWW.OGFJ.COM |

2014 Genscape monitored pipeline


2015 Genscape monitored rail
2015 Genscape monitored pipeline
OIL & GAS FINANCIAL JOURNAL

MARCH 2015

3/3/15 3:40 PM

F2: GENSCAPE MONITORED RAIL DELIVERIES


450,000
400,000
350,000

bpd

300,000
250,000
200,000
150,000
100,000
50,000
0

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 1 3 5
2014
2015

Weeks

Unloading Cushing
Unloading East Coast

Unloading Gulf Coast


Unloading West Coast

Pipeline in the second quarter of 2009. The frequency of rail movements into the
terminal often shows the value of moving Bakken crude to Cushing versus coastal
markets.
At the beginning of 2015, the cheapest destination for Bakken crude sent on rail
was to Stroud, according to Genscape. US West Coast destinations were the next
inexpensive over US Gulf Coast destinations, while East Coast destinations boasted
the most expensive rail-delivered Bakken price at that time.
Spot rail movements declined greatly in the past year to the Gulf Coast, namely
the hub at St. James, La., as a flood of regional light sweet and relatively cheap crude
competed with Bakken imports. In addition, at the start of 2015, North Dakota Bakken
crude-by-rail spot movements into the East Coast slowed because of narrow arbitrage
and attractive imported crude prices.
With Brent trading very close to WTI, Cushing seems like the best market for
Bakken crude now. RBN Energy analyst Sandy Fielden said in January. It would be
better to send it there by pipeline than rail, but if you have a bunch of rail-cars and a
terminal, then I guess it makes sense.
Cowen and Company senior analyst Sam Margolin agreed, saying that the increased
contango is making Cushing more attractive these days. Its possible that Bakken
production field prices are at material discounts to most hubs including Cushing
and Clearbrook, (Minn.), Margolin added.
Crude may have also been railed to the Cushing market to blend with other grades,
a trader said, adding that Cushing is as good a market as any for current rail economics, with rail costs to Oklahoma cheaper than to coastal markets. With Bakkens
crude quality similar to WTI, some barrels may be blended into domestic sweet crude
to deliver against the NYMEX light sweet crude futures contract.
Given the steep WTI contango, rail transportation cost advantages and blending
capability, railing Bakken shipments to Cushing have been economically appealing,
and the US Midcontinent or PADD 2 is the home of the Bakken crude Citgo general
manager of crude supply Jorge Toledo said in a recent presentation.
RAIL SAFETY REGULATIONS TO INCREASE

Increasing safety and environmental regulations, including new rail-car standards,North


Dakota mandates to reduce gas flaring, and North Dakota light-ends removal regulations have combined to put pressure on North Dakota crude oil producers.
The light-ends removal regulations will require all crude produced in North Dakota
MARCH 2015

1503ogfj_31 31

OIL & GAS FINANCIAL JOURNAL

WWW.OGFJ.COM

to have a vapor pressure of no more than


13.7 pounds per square inch by April 1.
This will require producers to build infrastructure to remove natural gas liquids
from Bakken Crude oil before
shipment.
Under the order, all Bakken crude oil
produced in North Dakota will be conditioned with no exceptions, the North
Dakota Industrial Commission said in a
statement.
Opinions on the cost of this additional
processing varies, some sources believe
it could add as much as $1-2/bbl to the
price of Bakken crude. However, the
North Dakota Department of Mineral
Resources estimates the capital cost of
the oil conditioning regulation to be near
$20 million, equating to $.10/bbl, North
Dakota Minerals Department Director
Lynn Helms said in a monthly North Dakota production call in December 2014.
Either way,a small sum could be a high
price to pay in the current crude-by-rail
economic environment.
Crude-by-rail producers and other
shippers could face costs associated with
new US rail-car regulations. The US Department of Transportation in 2014 proposed three different tank car designs for
the new DOT-117 specification as of January 2015. DOT-111 tank-cars could be
phased out or require costly modifications to comply with the new
standards.
The cost of rail-car modifications are
estimated to be between $26,000 and
$34,000 per car, according to the Pipeline
and Hazardous Materials Safety Administration. Market participants are anticipating new rail-car regulations to be
handed down in the first quarter.
ABOUT THE AUTHORS

Bridget Hunsucker, senior


editor at Genscape, is based
in Houston.
Hillary Stevenson, supply chain network manager for
Genscape, is based in Louisville, Ky.

31

3/3/15 3:40 PM

Kansas

Anadarko Basin
Granite
Wash

Missouri

Oklahoma

W Ca STACK
oo na
df
or
d
SCOOP

Fayetteville

Arkoma Basin
Arkoma
Woodford

Ardmore/Marietta
Basins

Arkansas

Mississippi

Texas
Louisiana

Source: Energy Information Administration.

Multiple stacked plays in Anadarko Basin


INGENUITY HELPING OKLAHOMA SHIFT FROM PURE NATURAL GAS PLAYS TOWARDS LIQUIDS
IPAA, WASHINGTON, DC

THE PIONEERING OF ANADARKO Basins several Woodford

shale plays in Oklahoma have helped turn around that states oil
and natural gas production over the past decade, reversing a severe
slump that began in 1985 for oil and the 1990s for natural gas.
More recently, the Cana Woodford play and extensions such as
the SCOOP, also known as the South Cana Woodford, and the
STACK, have highlighted the shift in interest away from pure natural
gas plays, especially in Oklahoma, toward those with more liquids
potential. A key feature of these Anadarko Basin plays is their
multiple, stacked geologic horizons compared with some other
major plays across the US, highlighting the added importance of
managing efficiency and costs.
Other plays in Oklahoma such as the Granite Wash, straddling
the border with Texas, and the Mississippian Lime, extending down
from Kansas into Oklahoma, have also contributed to the states
dramatic turnaround. Shale activity has boosted the states natural
gas output by nearly 38% between 2003 and 2013, to 2.14 trillion
cubic feet annually, according to US Energy Information Administration (EIA) data.
One fourth of Oklahomas natural gas production now comes
from shale formations. The states output of natural gas liquids also
32

1503ogfj_32 32

rose over that period, from 74.7 billion cubic feet equivalent in
2003 to 140.3 billion cubic feet equivalent in 2012. Oklahomas
crude oil production jumped 25% in 2013 from 2012, and this years
first-half production, averaging over 350,000 barrels per day, was
more than double the 2005 level, according to the EIA.
GEOLOGY AND RECENT ACTIVITY

The Woodford shale is a world-class source rock and covers a vast


territory spreading over several geologic basins in Oklahoma and
beyond, including the Arkoma Basin (eastern Oklahoma and
extending into Arkansas), Ardmore and Marietta Basins (southern
central Oklahoma), and Anadarko Basin (western Oklahoma and
beyond). The Arkoma Basin is also home to the Fayetteville play
on the Arkansas side of the basin, while the Anadarko Basin also
includes the Granite Wash play.
In the early 2000s, attention on the Woodford shale was focused
on natural gas in the Arkoma Basin, extending the experience
gained with the Barnett natural gas play in Texas. However, there
was increasing attention on the Anadarko Basin beginning in 2007,
when the use of hydraulic fracturing and horizontal drilling began
to demonstrate the regions stronger natural gas yields and richer
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OIL & GAS FINANCIAL JOURNAL

to 7,000 feet deep, or the Barnett and the Marcellus, typically in the 5,000- to 10,000-foot
category.
With its relatively costly wells, the Cana Woodford/STACK is a clear example of how
the higher relative value of liquids versus natural gas in current markets has driven the
focus of operators from natural gas to liquids over the past three years. In 2011, nine out
of 10 rigs were drilling for natural gas, according to Baker Hughes data. So far in 2014, the
shift towards liquids has transformed the natural gas share to just 15%. As with the Eagle
Ford and Utica plays, liquids content varies by location. The STACK tends toward greater
liquids content toward the northeast, where liquids content of 30 to 40 percent would not
be uncommon.
One offshoot of the play, announced in 2012, is variously called SCOOP ( for South
Central Oklahoma Oil Province) or South Cana Woodford. As the name implies, this play
has extended activity further south in the state. However, the area is hardly new to the
industry, experiencing its first production more than 100 years ago with the Sho-Vel-Tum

700

400

600

350
300

Billion cubic feet

500

Natural gas

250

400
Crude oil
300
200
100

200
150
100

Thousand barrels per day

F1: OKLAHOMA OIL AND NATURAL GAS PRODUCTION

50

0
0
1989:Q1 1993:Q1 1997:Q1 2001:Q1 2005:Q1 2009:Q1 2013:Q1
Source: Energy Information Administration

F2: RIG ACTIVITY IN CANA WOODFORD,


ARKOMA WOODFORD, ARDMORE WOODFORD
100
90
80
Active rigs

70
60

Cana gas
Cana oil
Arkoma gas
Arkoma oil
Ardmore gas
Ardmore oil

50
40
30
20
10

4/
2
5/ 011
4/
2
8/ 011
4/
11 201
/4 1
/2
2/ 011
4/
2
5/ 012
4/
2
8/ 012
4/
11 201
/4 2
/2
2/ 012
4/
2
5/ 013
4/
2
8/ 013
4/
11 201
/4 3
/2
2/ 013
4/
2
5/ 014
4/
2
8/ 014
4/
11 201
/4 4
/2
01
4

2/

natural gas liquids content.


Although the Anadarkos wells are deeper and thus more costly to drill (9,000
12,000 feet in the STACK and 10,000
14,000 in the SCOOP compared with
6,000-8,000 in the Arkoma), the higher
natural gas yields, increased oil cuts and
relative value of its liquids content made it
a viable play. The Cana, SCOOP, STACK,
and Springer plays of the Anadarko Basin
together now see more rig activity than the
other two basins combined, according to
Baker Hughes rig counts.
The Anadarko Basins many formations
make for a particularly thick accumulation
of sedimentary rock, 40,000 feet worth at
its thickest interval in the south. Within
that extensive column, the Woodford shale
dates to the end of the Devonian period,
roughly 350 million years ago, when much
of Oklahoma was covered by a shallow sea.
Organic material trapped in the sediments
eventually transformed into oil and natural
gas trapped in sedimentary rock, including
the combination of relatively impermeable
shale and siltstone that make up the several
hundred feet in thickness of the Woodford
shale.
The US Geological Survey estimated in
2010 that the Anadarko Woodford plays
(oil and natural gas combined) held approximately 18 trillion cubic feet of undiscovered, technically recoverable natural
gas, 393 million barrels of oil, and 251 million barrels of natural gas liquids.
The Cana Woodford play is named for
Canadian County, located in the center of
the state. Devon Energy and Cimarex Energy both played a notable role in the early
chapters of the Cana Woodford play.
STACK extends the traditional Cana field
to the northeast, where liquids yields are
higher.
Although the first horizontal well was
drilled in 2007, vertical wells from several
conventional reservoirs were producing oil
and gas as early as the 1930s in the Cana
Woodford area. Horizontal drilling in the
Cana Woodford/STACK is relatively deep,
and thus more costly than for some other
major plays. Currently, most wells fall into
the 9,000 to 12,000 foot range, deeper than
wells in, for example, the relatively shallow
Fayetteville natural gas play with wells 1,500

Source: Baker Hughes

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33

3/3/15 3:40 PM

field a field that has produced hundreds of millions of barrels since then. However, the
main targets of the SCOOP play lie deeper, at perhaps 10,000 to 14,000 feet. The plays high
liquids content is held to be especially attractive, with yields of 30%, 30% NGLs, and 40%
natural gas reportedly a representative result. Lower initial decline rates have been another
positive feature of many SCOOP wells, based on recent operator data.
The STACK is another recent extension of the Cana Woodford. Announced in the fall
of 2013 by Newfield Exploration Company, the STACK play has expanded Woodford activity towards the northeast. As the name implies, this is a stacked play, with a major target
being the upper Meramec formation. The Meramecs source rock, the Woodford shale,
lies close below it, separated by the thin Osage. These formations, along with the Hunton
below the Woodford, comprise additional targets of the STACK. Hydraulic fracturing
comes into play because the Meramec is relatively impermeable without natural or manF3: WELLS COMPLETED, CANA WOODFORD
120

Cana Woodford
Arkoma Woodford
Ardmore Woodford

100

PERSPECTIVES

Wells

80

The Cana Woodford and related plays may


be deeper and more costly than some other
major US plays, but by targeting high liquids
content wells, optimizing drilling efficiency,
using better proppant recipes, and applying
experience and skillful reservoir analysis,
operators have maintained the play as a
viable contributor to Oklahomas turnaround in crude oil production.
According to a recent IHS study, unconventional oil and natural gas activity contributed 65,325 direct and indirect jobs in
the state in 2012, and is projected to grow
to 149,617 in 2020 and 225,387 by 2035.
Interestingly, this is in a state hosting a
particularly diverse mix of operators, with
the top 20 producers in the state accounting for just 43% of oil production and 66%
of natural gas production.
The activities of these diverse participants in the Woodford, along with other
plays in the state, have helped Oklahoma
reverse its long-term decline in crude oil
and natural gas production, achieving in
2013 its highest crude oil output in 25 years
and its highest natural gas production in
22 years.

60
40
20

:Q
14
20

14
20

:Q

:Q

4
14
20

13

:Q

:Q
20

13
20

20

13

:Q

1
:Q

4
:Q

13
20

3
:Q

12
20

12

:Q

20

12
20

20

12

:Q

Source: Baker Hughes

F4: OKLAHOMA INDUSTRY-RELATED EMPLOYMENT


90,000
80,000

Jobs

70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Oil and gas field machinery and equipment
Natural gas distribution
Pipeline transportation
Oil and gas pipeline construction

Geophysical surveying and mapping services


Support activities for oil and gas operations
Drilling oil and gas wells
Oil and gas extraction

Source: Bureau of Labor Statistics. Oil and gas field machinery and equipment not available for 2003-2004.
34

1503ogfj_34 34

made fracturing. Drilling targets range from


9,000 to 12,000 feet. Representative outcomes in the STACK are reported to be
around 50%, 25% NGLs, and 25% natural
gas.
For the Cana and its offshoots, as in any
play, the management of costs and efficiencies always plays an important role. According to data from Baker Hughes, operators were drilling about 1.5 wells per rig in
the first quarter of 2012. But with experience and attention to efficiency, they have
been averaging 2.5 wells per rig more recently.Thus, despite a decline in the rig
count, the number of wells drilled in the
third quarter of 2014 was above 80, compared with an average of 77 per quarter in
all of 2012.

The IPAA thanks to Paul Korus, Bruce


Stallsworth, Cindy Hassler, William Schneider, Marcus Krembs, Todd Moehlenbrook,
Kristin Hincke, Paul Blanchard, Steve Trammel, and Bob Fryklund for reviewing this
piece.

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ENERGY BANKING: EXPERTISE & RELATIONSHIPS

@1503OGFJ35-49-p01.psd@

ENERGY BANKING
Expertise & Relationships

MARCH 2015

1503ogfj_35 35

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35

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ENERGY BANKING: EXPERTISE & RELATIONSHIPS

Energy bankers have your back


Weather in Texas can change quickly and dramatically. During the winter, it is not uncommon in some
parts of the state for the temperature to drop 40 to 50 degrees Fahrenheit in a matter of hours as a blue
norther blows through. The Lone Star State is known for spectacular storms, from hurricanes along the
Gulf Coast to tornadoes in North and West Texas.
The oil and gas industry can be just as volatile as Texas weather one day prices are up and the next
they are down. Recently, prices declined from $100 to less than $50 in about six months. Unfortunately,
even veteran oilmen dont always adequately prepare for the down cycles.
Theres a reason for this. Oil and gas people are consummate risk-takers and optimists. Its the hallmark
of an industry that is searching to extract a hidden treasure thousands of feet below the surface. Its hard
to be risk averse in an occupation that rewards the successful so well. If youre afraid of risk, this is probably the wrong industry for you.
That said, its necessary to manage risk in the petroleum business. Energy bankers and financial service
firms are experts at helping companies minimize their exposure to risk while aiding them in their efforts
to achieve financial success. A good investment bank has the breadth of expertise over banking, advisory
and capital markets, trading and hedging, funds management, asset finance, securities, and research
and analysis. The range of products and services offered can be an enormous benefit to oil and gas
customers.
In this issue of OGFJ, we talk to the experts at Macquarie who tell us about the opportunities that are
available to prudent operators and investors in a down market. They tell us that low-price environments
can create compelling possibilities for well-positioned players with strong balance sheets, ample liquidity,
and hedged production.
We also hear from Eran Chvika of Norton Rose Fulbright, who discusses reserve-based lending as a
flexible method of financing that is attractive to both lenders and borrowers because the availability of
funds is based on the value of oil and gas assets.
Finally, Muhammad Waqas looks at project finance, a type of long-term infrastructure financing
whereby the loan is repaid from the cash flows generated by the project. Its a lot more complicated than
that, but read Muhammads article starting on page 42 to learn more.
We hope you find this special Energy Banking issue interesting and useful.

Good reading!

Don Stowers
EDITOR OGFJ

36

1503ogfj_36 36

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DEBT CAPITAL | SYNDICATIONS | TREASURY SOLUTIONS | RETIREMENT PLANS | HEDGING

Your Bottom Line


Is Our Top Priority.
Solutions you need from bankers who know your business.

Mickey Coats | 918.588.6409


boknancial.longliveyourmoney.com/energy
2015 BOK Financial Corporation. Services provided by Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust, divisions of BOKF, NA. Member
FDIC. BOKF, NA is a subsidiary of BOK Financial Corporation.

1503ogfj_37 37

3/3/15 3:40 PM

ENERGY BANKING: EXPERTISE & RELATIONSHIPS

RBL: An attractive funding tool


RESERVE-BASED LENDING IS A USEFUL METHOD OF FINANCING FOR BOTH LENDERS AND BORROWERS
ERAN CHVIKA, NORTON ROSE FULBRIGHT LLP, PARIS

RESERVE BASED LENDING (RBL) is a flexible method of fi-

nancing that is attractive for both lenders and borrowers, in


which availability of funds is based on the value of oil and gas
assets of the borrower as revised from time to time.
Lenders may limit their risk by linking facility amounts to
the net present value of one or several of such assets (whether
or not currently producing), which corresponds to the difference between the present value of the amount of oil and gas
that could be recovered and the project costs.
Theattractiveness for the lenders is linked to the fact that
the risk associated with the volatility in commodity prices/
market values for such assets is mitigated by the flexibility of a
reserve-based loan, and lenders may continually adjust loan
parameters either upwards or downwards to maintain adequate
loan-to-value and cash flow coverage ratios to take into account
38

1503ogfj_38 38

a borrowers activity (e.g.increases or decreases in oil and gas


production).
For oil and gas companies that are either in a development
phase in which production is imminent or already producing
oil and gas and need to fund expansion, RBL provides an attractive and elastic financing tool in which amounts available
are determined by expected production. Repayment of the debt
stems from the revenue derived from the sale of the oil and gas
rather than from immediate balance sheet strength.
The RBL loan market has its origins in the US in large project
financings by majors and large independent oil and gas companies in the 1970s. In recent decades, banks have become
increasingly prepared to lend to smaller to medium-sized sponsors in emerging markets that lack the same access to corporate
loans as the majors.
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ENERGY BANKING: EXPERTISE & RELATIONSHIPS

The RBL market has expanded over subsequent decades


across the globe, and there is currently an increase in the demand
for the use of such financing technique. However, market standards continue to vary considerably between jurisdictions such
as the North American and UK markets, in which the practice
is highly developed, and other jurisdictions such as countries
in sub-Saharan Africa, in terms of acceptable asset categories,
lending structures, and security packages.
RBL financing is fundamentally different from other financing tools primarily due to the producing nature of the reserves
and the variation of the facility amount, which is calculated on
the basis of the expected net present value of future production
from the fields, or the borrowing base. Regardless of the geographic location of the relevant market, there are a number of
key issues that must be examined both by sponsors and prospective lenders. These issues are considered in this article.
FLUCTUATING FACILITY AMOUNT

The facility amount is based on the borrowers working interest


in one or more upstream assets and is generally equal to a
discounted amount of the net present value of the borrowers
future income from oil and gas developments in such assets.
The size of the facility is periodically determined by valuation
of the reserves made by technical consultants based on economic/financial criteria and in particular on well-established
production performance derived from volumetric, comparison
with similar reservoirs, a computer simulation of new producing zones given lesser weight, geologic conditions and sand
continuity, reservoir energy, and revised commodity pricing
assumptions.
As the borrowing base is therefore keyed to such valuations,
forecast and redetermination provisions are highly negotiated
in RBLfinancings. The borrower and lenders are permitted to
review and object to any forecast under the RBL documentation
in a revised forecast which is resubmitted for review.
The amount of the facility will be increased or decreased by
the addition or removal of qualifying assets at the borrowers
request or to meet mandatory prepayments due to a fall in the
value of such assets.
In the event that the amount of the facility exceeds the value
of the assets, there is a cancellation of the commitment in excess
of the relevant value and a mandatory prepayment of outstandings in excess of value will be required, with any failure to make
such prepayment potentially triggering a default.
By contrast, if the value of assets exceeds amount of the facility, the lenders should increase the available facility amount by
such excess.
RBL-SPECIFIC COVENANTS

Although RBL has some similarities to traditional lending facilities, there are some key differences, including the discretion
given to lenders to revise commodity pricing assumptions in
order to value the reserves and to set the credit limit in the
course of the life of the RBL loan, which is generally shorter
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OIL & GAS FINANCIAL JOURNAL

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RBL financing is fundamentally different from


other financing tools primarily due to the producing nature of the reserves and the variation of the facility amount, which is calculated
on the basis of the expected net present value
of future production from the fields, or the
borrowing base. Eran Chvika

than the expected production life of the reserves.


For instance, several banks made available a short crude oil
pre-export, two-year term facility to Moni Pulo Limited, a significant Nigerian independent oil producer, when it accessed
the international market for the first time. The purpose of this
facility was to invest in existing production and assist with
payments due in respect of new licenses awarded to this company. The amount of the facility was based on the banks assessment of the reserves in the field operated by the company
and the production and price curves over the life of this term
facility.
RBL documentation typically includes several covenants to
address specific lender concerns similar to those found in other
financings, such as financial covenants, restrictions, specific
cash waterfall provisions, prohibitions on additional indebtedness, and distributions. It also includes borrowing base deficiency provisions. The borrowing base deficiency can be cured
by the borrower adding additional oil and gas properties to the
collateral base. Alternatively, the lenders can agree to graduated
reductions in available lending commitments.
The RBL documentation typically allows debt levels/amortization to be either increased or decreased to levels that maintain loan-to-value and cash flow coverage ratios that take into
consideration changes in cash flow caused by acquisition, increase/decrease in production, operative costs or drilling activity
since the last redetermination, any of which could impact the
expected ultimate recoveries of reserves.
Bank legal counsel will also review and evaluate the borrowers title to its oil and gas properties to verify that it matches
the net revenue interest reflected in the technical consultants
reports and forecasts.
Lenders require that the oil and gas entities further provide
a number of financial documents and specialist reservoir
engineers analysis on a regular basis, or to be notified of the
occurrence of certain events (e.g., any force majeure event
affecting the borrowing base asset) in order to enable them
to monitor the increase or decrease of production, the general
financial situation of the oil and gas entity, and the ability of
the entity to comply with all obligations under the RBL loan.
The lenders will further require the oil and gas entities to
provide a number of specific covenants in the RBL loan agreement regarding the manner in which they carry out their business in order for the lenders to have a degree of control over
such activity and management, such as key-men provisions.
39

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ENERGY BANKING: EXPERTISE & RELATIONSHIPS

RBL FINANCING STRUCTURE


Guarantee
100%
Security
Asset holding
company

Asset

Bank
Loan

Asset

A breach of any of such covenants may lead to an event of default


and give to the lenders the right to accelerate the RBL loan.
SECURITY PACKAGE

Lenders normally require at least 80% of the initial collateral value


to be covered by a perfected security interest and to have clear title
under the security package.
A key legal consideration for any lender seeking to take security
will be the licensing regime under which the borrowing base assets
are operated. In many jurisdictions, it is not possible to take security
in favor of the lenders over the underlying physical reserves themselves while they remain in the ground since these are often
owned by the host country rather than by the operator, which
cannot grant security over reserves to which it does not have title.
In this context, obtaining acceptable security over the reserves
would require the host government to grant advance approval to
the assignment or transfer of such title in certain circumstances,
a daunting prospect that may be difficult and time demanding to
obtain.
For this reason, lenders generally look to other forms of security,
such as assignments or pledges of contractual rights arising, for
example, under an oil and gas license, a production sharing agreement (PSA), or a joint operating agreement (JOA) and negotiate
a suitable security package in line with the local legal framework
and market practices.
Generally, a pledge over the shares of the borrower oil and gas
entity holding an interest in the license is considered as the security
option of choice since it enables the lenders to take over such
company upon the occurrence of an event of default and the enforcement of such pledge.
The assignment of key contracts is also often part of any security
package and includes an assignment of the borrowers rights, including any receivables due.
A pledge over the borrower entity bank accounts, in addition
to a detailed bank accounts agreement, provides further comfort
to the lenders in order to have adequate control over cash flows
arising from the relevant borrowing base.
Many oil-producing jurisdictions in sub-Saharan Africa are
40

1503ogfj_40 40

member states of OHADA, an organization created by treaty for


the harmonization of business and commercial law in Africa.
OHADA has promulgated a number of uniform laws, which, upon
approval by the Council of Ministers, are automatically applicable
in each of such member states.
Recent modifications to the OHADA Uniform Act on Security
Interests and the OHADA Uniform Act on Commercial Companies
have resulted in a modern and sophisticated legal regime for the
taking of security interests in a RBL context, including the ability
to grant all security to a single security agent, an effective means
of creating a security assignment of commercial receivables despite
any contractual provision to the contrary, specific provisions
permitting both outright cash collateral by way of transfer of title
to the cash and pledges over outstanding balances from time to
time of charged bank accounts, streamlined procedures for creating
security over tangible fungible assets, company shares and receivables and, most critically, the ability to enforce most forms of security
by outright transfer of the pledged assets to the beneficiary of the
security (pacte commissoire), subject only to subsequent evaluation by expert and return of any surplus value of such assets over
the secured debt to the security provider.
Nevertheless, it should be borne in mind that the legal framework
of oil and gas exploration and operation of each OHADA member
state remains a matter for its own legislation, and that the ability
of borrowers in such jurisdictions to open and maintain bank accounts outside the relevant jurisdiction and their obligations to
repatriate in-country the proceeds of sale of offtake into foreign
jurisdictions will be subject to exchange control rules, either on a
national level or those promulgated by west or central African
central banks pursuant to regulations promulgated by regional
monetary and finance unions.
It should also be noted that, although RBL is generally a technique of leveraged financing that involves lending on a non-recourse
basis, in certain transactions lenders require a parent company
guarantee securing the obligations of the asset holding company
under the RBL loan.
Furthermore, where borrowing bases consist of assets owned
by several entities within the same group, lenders may, subject to
local guarantee restrictions, require each asset-owning entity to
cross-guarantee the debts of each other entity and the liabilities
to be secured by each of their assets.
There are therefore a number of differences between standard
financing methods and RBL financings. Precedents do not set out
the boundaries, and lenders, borrowers, and their advisers need
to work together to create tailor-made solutions to address those
differences in the negotiation and documentation stages of a RBL
setup.
ABOUT THE AUTHOR

Eran Chvika is a senior associate in the energy team


of Norton Rose Fulbright LLP in Paris.

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ENERGY BANKING: EXPERTISE & RELATIONSHIPS

Project finance
MUHAMMAD WAQAS, MECHANICAL ENGINEER, UNITED ARAB EMIRATES

PROJECT FINANCE has become a pivotal part of the current oil

and gas exploration projects. In order to discuss the legal, political


and commercial environment in which project finance operates,
this article will first discuss the salient features of project finance
and then shed light on recent trends in the project finance market
that underpin its importance to oil and gas industry. Next, a debate
on the roles and responsibilities of involved parties along with the
risks inherent to project finance. Lastly, the article will establish
the link between project finance and the neoclassic economic
model.
PROJECT FINANCE

International Project Finance Association (IPFA) defines project


finance as the financing of long-term infrastructure, industrial
projects and public services based upon a non-recourse or limited
recourse financial structure where project debt and equity used
to finance the project are paid back from the cash flow generated
by the project.
In essence, project finance is a type of lending where financers
to the project do not scrutinize the business standing of the project
sponsor or the underlying value of the assets to approve the loan.
It is rather the projects ability to repay the debt from the cash flows
generated by the project assets which is examined.
Project finance is essentially characterized by the creation of a
Special Purpose Vehicle (SPV) by the project sponsor using debt
and equity. This SPV is legally an independent entity from project
sponsor, thus completely isolating the assets and finance of project
sponsor from SPV. The lenders to the project usually have limited

or no recourse available once the project is complete. It is thus the


future cash generated by SPV which is used to repay the debt and
dividends while the assets of SPV act as collateral.
HISTORY OF PROJECT FINANCE

The history of project finance can be traced back to the Roman


Empire who used to finance the export of goods between different
Roman colonies much like present day Export Credit Agencies
(ECA). But it was not until the late nineteenth century that modern
project finance evolved.
The first days of project finance in oil and gas exploration dates
back to 1930s Texas and Oklahoma. Funds were made available
to oil and gas companies based on the revenues generated from
the exploration activities and subsequent long-term sale contracts
of oil and gas extracted from wells. This method of financing the
exploratory activities was later adopted by UK in 1970s and further
by wider Europe. Project finance helped to develop and reshape
the current oil and gas industry of UK which is currently contributing around 11.5 billion GBP to national exchangeur.
EXPANSION OF PROJECT FINANCE

Public Utility Regulatory Policy Act 1978 (PURPA) led a campaign


of expanding project finance. PURPA gave an incentive to all Independent Power Producers (IPPs) to produce cheap and efficient
energy which would be bought by utilities. This resulted in the
explosion of the project finance market as more and more power
plants were constructed to run on alternative and renewable energy
making use of project financing.

F1: PROJECT FINANCE MARKET


140

500
Emerging markets number of deals

450

Emerging markets value of deals (US $ m)

400

US $, Million

100

350
300

80

250

60

200
150

40

100

20
0

Number of deals

120

50
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2011 data incomplete at time of original graphs production.


Source: Rod, M 2012, The Principles of Project Finance, Gowen, Surrey

42

1503ogfj_42 42

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ENERGY BANKING: EXPERTISE & RELATIONSHIPS

By the late 1980s, the developed countries had made full use of
project financing and there was little room for new opportunities.
In this scenario, adventurous entrepreneurs headed to developing
countries. This eastward move by project sponsors was driven by
the fact that ECAs were fully supporting the project finance while
poorer developing countries offered a new horizon for expansion.
These developing countries lacked funds and general know-how
to undertake ambitious infrastructure projects. Project sponsors
were armed with both funds and knowledge, leading to the second
wave of project finance expansion and thus evolved the present
day project finance.

sponsor are isolated. So even if the project fails, the net effect on
the project sponsor is the equity stake in the SPV. Though project
finance is typically more expensive than corporate finance, its main
advantage is that existing assets are not liable to compensate in
case of project failure. Additionally, in project financing, the project
sponsor can take on higher debt compared to its equity contribution which is done based on future cash flows of SPV. While in
corporate financing, the debt is based on the financial strength of
the project sponsor and hence lower debt is granted. Table 1 shows
a comparison between the two.
PARTIES TO PROJECT FINANCE

TRENDS IN PROJECT FINANCE

While project finance saw steady growth over past two decades,
the trend was slightly reversed by the recent recession. Western
economies faced a general economic meltdown along with credit
crunch. This led to the decrease in the industrial and economic
output which made the setting up of new industrial units unfeasible.
Thus, project finance faced a downward trend in established
economies.
Emerging economies like BRICS (Brazil, Russia, India, China
and South Africa), largely remained unaffected and escaped the
credit crunch faced by established economies. The project finance
market expanded in these emerging economies due to a wide gap
available for infrastructure projects and the disbursal of cheap
credit by their respective governments. This trend between established and emerging economies appears to be widening with the
creation of the New Development Bank ( formed on 15th July 2014,
formerly BRICS Development Bank).
Figure 1 shows the project finance market well over $250 billion
in emerging markets in the middle of recession, making it larger
than the $170 billion Initial Public Offering (IPO) market.
WHY PROJECT FINANCE

In order for an entrepreneur to take on a capital intensive project


and expand on the economic activity, one looks at corporate financing or project financing. In the former, the project is financed
by its own balance sheet while the latter is financed off balance
sheet by incorporating a SPV.
In corporate financing, the project sponsor makes use of its
existing assets to draw up the project. If the project is unsuccessful,
the whole entity of project sponsor is used up in paying off the
debt. While in project financing, all existing assets of the project
COMPARISON BETWEEN CORPORATE
AND PROJECT FINANCING
Factor

Corporate financing

Project financing

Guarantees

Existing assets
of the borrower

Project assets

Accounting

On balance sheet

Off balance sheet

Finance grant variable

Financial soundness

Future cash flows

Leverage

Depends on
balance sheet

Cash flows by SPV

MARCH 2015

1503ogfj_43 43

OIL & GAS FINANCIAL JOURNAL

WWW.OGFJ.COM

Entities in a typical project finance environment are detailed in


Figure 2.

Project sponsor
The project sponsors in an entity or group of entities which envisages the actual project. They contribute equity to the SPV. Broadly
speaking, there are three distinct kinds of project sponsors depending upon their motivation to sponsor a project.
Existing industry players - The intent of this group is to maximize
the value for shareholders by creating new business lines or
increasing the value of existing businesses. This is done by
optimizing the supply chain or by expanding the existing core
business. While optimizing the supply chain, the sponsoring
entity becomes a supplier or an off taker to the project output.
The entity may also be interested in becoming an eventual
construction contractor or operations and maintenance contractor once the project is in the cash generation phase, thus,
guaranteeing itself with a business. However, later arrangements
are uncommon in Public Private Partnership (PPP) due to
stringent procurement rules.
Public entities - This group forms the national governments or
designated entities like a municipalities or national companies.
The main agenda is to create welfare for the public and embark
on sustainable economic development for the country. In doing
so, jobs are created; economic output is increased; and masses
are educated in new fields. This group is most common in the
F2: TYPICAL PROJECT FINANCE
ENVIRONMENT ENTITIES
Project
sponsor

Raw
material
supplier

Project
company
(SPV)

EPC
contractor

Product
buyer

Operations
contractor

43

3/3/15 3:40 PM

ENERGY BANKING: EXPERTISE & RELATIONSHIPS

project finance market in both the developing and the developed


world. The public entity in this scenario either operates the
project by itself to generate revenues directly from the general
public or gives concession or licenses to other contractors who
operate the project based on:
BOO: Build Own Operate
BOT: Build Own Transfer
BOOT: Build Own Operate Transfer
DBFO: Design Build Finance Operate
BTO: Build Transfer Operate
BLT: Build Lease Transfer
Profit seekers - The aim of this group is to maximize the financial
gain on the capital employed. These sponsors are adventure
seekers who embark on riskier business in order to increase the
net profitability. This group usually remains dormant and is not
actively involved in any phase of the project. This type of sponsor
is common in new project finance industries like healthcare
where sponsors are more interested in contributing with equity
rather than lending.
Project lender
Project lending group consists of an array of distinctive sub-groups
whose role differs in project finance.
The first stage in lending starts with an advisor whose sole role
is to advise on the project profile. The advisor examines the project
feasibility along with its risk profile and commercial viability and
passes the information on to the second sub-group referred to as
the Mandated Lead Arranger (MLA). MLAs have a wide range of
coverage and contact. They are tasked to involve many banks in
the project finance deal and act as a coordinator for the financial
deal. This is called as syndication.
Financing is usually provided by:
International financial institutions like the World Bank
Multilateral financial institutions like the Asian Development
Bank
Regional development banks like the European Investment
Bank
Development agencies like the Abu Dhabi Fund for
Development
Export credit agencies like UK Export Finance
Apart from this, there can be local and regional commercial
banks involved in financing the project deal depending upon the
profile of the project and the mandate articulated in the articles
of incorporation.
Financing provided by the aforementioned agencies can be in the
form of:
Equity While rare, this arrangement gives more leverage to
the project sponsor in the form of a lower debt to equity ratio.
Loans This arrangement can be in the form of senior or junior
debt. It can also be in the form of mezzanine financing, giving
the lender a flavour of equity.
Leasing In this option, the lender leases the asset to SPV for
a certain period of time and, in return, gets an instalment.
Bonds This is an alternative to traditional financing where
44

1503ogfj_44 44

bonds are floated in the market and payments are done by SPV
based on principal amount and interest accumulated on the
bond.

EPC contractor
The Engineering, Procurement and Construction (EPC) contractor in a project can also be one of the project sponsors in non
PPP initiatives as discussed earlier. This entity is most crucial to
the project success as it assumes the responsibility to bring the
project from the drawing board to a full-fledged running plant
along with completing the project on time and within budget.
In case the project is delayed beyond the envisaged time, then
the estimated future cash flows of the project gets hampered thus
putting the company in default to its lenders. In order to incentivize the contractor, a bonus is set aside in case an early completion
is achieved by the contractor. On the other hand, a time liquidated
damage clause is also included in case of delayed completion.
However, it is to be noted that the project company has an agenda
to have an early completion and may put an ambitious project
completion timeline so that the project heads into early cash
generation phase. On the other hand, the contractor would like
to see a relaxed completion timeline so that work acceleration
cost can be avoided. In case a tight deadline is imposed by the
company, the contractor is ought to pass on the charges of liquidated damages to the project company as part of its quotation.
In case of over running the cost, the estimated budget of the
whole project gets distressed, which leads to shrinking the other
elements of the project along with the additional debt burden.
The project sponsor is usually reluctant to raise additional funds
from lenders once the project is underway due to which it is highly
desirable to complete the project within budget by the
contractor.
The EPC contracts can be:
Lump sum, in which case the contractor is obligated to deliver
the project on a turnkey basis for a fixed amount. This is only
possible when the scope of the project is well defined. This
kind of contract promotes innovation and efficiency along
with productivity as the contractor tries to keep the cost of
the project to a minimum.
Reimbursable, in which case the contractor is paid on a unit
rate basis for the work done. This is applicable where the
boundary of work is not well defined. This type of contract is
favorable to the contractor as payment is made for all work
done in addition to a mark-up.
Recently, there have been other innovative types of contracts
that combine elements of both lump-sum and reimbursable
contracts like cost plus contract, reimbursable with lump sum
conversion at a certain stage of a contract. Another type of contract
called an open book estimate (OBE) allows a project company
full access to a contractors estimation of the project. In this case,
the project company has thorough knowledge of the contractors
mark up. This is usually done in regions where there are limited
contractors and a proper estimation of a project scope is not
achievable.
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3/3/15 3:40 PM

ENERGY BANKING: EXPERTISE & RELATIONSHIPS

Sales & purchaser


This party is responsible for purchasing the goods produced by
the project and thus generating the cash for the project company.
In hydrocarbon exploration, the product produced is oil and gas,
which is usually sold to refineries or utilities for power generation.
It is thus not uncommon for a project company to have a sponsor
which is an off taker. In doing so, the sponsor optimizes its supply
chain with a continuous and uninterrupted supply of raw material.
The downside to this arrangement is a delay or shutdown in the
project. The sponsor company is adversely affected by a reduction
in dividends and a delayed supply of raw material.
The most common types of off take agreements are:
Take or Pay in which the off taker is obligated to pay for the
product even if it does not consume the product. This type of
agreement is mostly common in project finance environment
as the SPV would like to have a steady and guaranteed cash
flow to pay off its debt and dividends.
Take and Pay in which the off taker only pays for the product
consumed.
46

1503ogfj_46 46

F3: PHASES OF RISK


Pre-completion

Activity planning
Technological
Construction

Turnkey EPC
contract

Postcompletion

Supply risk
Operational risk
Market risk

Put or pay
agreement
O&M agreement
Offtake
agreement

Common

Interest rate risk


Exchange risk
Inflation risk
Environmental risk
Regulatory risk
Legal risk
Credit counter
party risk

Use of derivative
contract
Use of insurance
policies

Source: Gatti, S 2008, Project Finance in Theory & Practice

F4:OIL AND GAS FUND RAISING


900
800
700
US$ billion

Operations & maintenance contractor


O&M contractor takes over once the EPC contractor has demonstrated a satisfactory performance of the plant. There is usually an
overlap between the EPC and O&M phase where the EPC contractor
is commissioning the plant while the O&M contractor is taking
full control of the plant.
Unlike the EPC contract, these contracts are usually done on a
long-term basis, which can sometimes span up to the life of the
plant. O&M contractors are usually specialized, but it is not uncommon for project sponsors to create a joint venture to execute
the O&M activities in private initiatives.
The project company can roll out one O&M contract or split
the operations and maintenance between two different contractors. This depends on various factors like criticality and secrecy of
plant operations.
O&M contracts can be:
Lump sum where the contractor is paid a fixed amount for a
certain time period.
Cost plus where the contractor is paid a mark-up on its cost.
Work order basis where the basis of payment is the number of
work orders closed and services rendered.
Manpower supply contracts where a contractor has no inherent
responsibility to the operations of the plant. The contractor
supplies experienced manpower to the project company who
is ultimately responsible for the operations and maintenance
of the plant.
Since O&M is the cash generation phase of the project, great
attention is needed while planning the type of contract employed.
Any hiccup or incompetency shown by the O&M contractor can
bring the whole plant down along with evaporating any possible
cash revenues. Oil and gas is an inherently dangerous industry and
great care is needed while awarding the O&M contract as a small
overlook can trigger catastrophes like the Macondo blowout and
the Piper Alpha explosion.

600
500
400
300
200
100
0

2010
2011
Equity
Bank loans

2012
2013
Project finance
Bonds

Source: Ernst & Young

F5: OIL AND GAS SECTOR BONDS BY TYPE


Convertible bond
2.2%
Private
placement
bond
19.7%

Hybrid bond
0.4%
Public bond
77.7%

Source: Ernst & Young 2014, Funding Challenges in Oil & Gas Sector
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ENERGY BANKING: EXPERTISE & RELATIONSHIPS

Capacity Agreement in which the off taker agrees to pay for


a minimum product even if it does not consume. This type
is common in oil and gas pipeline contracts where the off
taker agrees to use a minimum level of capacity of pipeline
even if it is not utilizing it.
The project company generally has one or more purchase
agreement or at least an understanding in place even before
the project is visualized. This is done to make the project commercially viable and to sell the project to lenders.
Raw material supplier
Raw material supplier entity is an exact opposite to sales and
purchase. They are responsible for supplying the company with
raw material in order to manufacture the desired product. In
oil and gas exploration, there is no raw material supplier as
hydrocarbons are extracted from the ground once the government has granted the concession. However, in the midstream
and downstream oil and gas industry, the raw material suppliers
are upstream and exploratory companies who bring the hydrocarbons above ground and feed the degasification plants and
refineries.
The types of agreements of raw material supplier are identical
to sales and purchase agreements discussed previously. However,
the project company may not necessarily make use of back to
back to agreement. e.g. A project company may agree to have
a long term take and pay agreement with its supplier while
signing a take or pay agreement with its purchaser.
RISK MANAGEMENT

As in any study, the risk management in project finance


involves:
Risk identification.
Risk analysis.
Risk transfer.
Residual risk management.
The project company employs different strategies while
managing the integral risk to the project. It may decide to retain
the risk which requires a great deal of convincing to the lenders.
On the other hand, the company may allocate the risk to one
of its counterparties. This can be explained by the following
example.
The cash flows of a project company are of paramount importance to pay off the debt. Thus any interruption in cash is
a risk. As part of actively managing the risk, the company may
undertake a long term sales contract with one of its off taker
in order to have a guaranteed income. However, it is possible
that the off taker defaults on its obligation to pay off the company. In this case an overdraft facility is maintained so that the
working capital is not affected along with cash flows.
PHASES OF RISK

The project company has two distinct phases which come with
their own inherent risks. However, few risks are common in
both these phases (see Figure 3).
48

1503ogfj_48 48

Pre-completion risks can be categorized with the risks which


are encountered prior to the completion of the project. This
phase terminates with the turnkey contract and signing off of
the project completion certificate to the contractor.
Post completion risks are faced once the project heads into
the operational phase. The company has started producing an
output and generating cash for the company.
NEOCLASSICAL ECONOMIC MODEL

The neoclassical economic model is based on the belief that


competition leads to an efficient allocation of resources, and
regulates economic activity that establishes equilibrium between
demand and supply through the operation of market forces.
There have been vocal critics of the neoclassical economic
model and the project finance market seems to fit their assertion. This can be explained by a simple stat that oil and gas
upstream faced $700 Bi investment in 2013 but funds provided
by project finance remained stagnant in this period along with
the bonds market (see Figures 4 and 5).
Though one can argue that the world was recovering from
the Great Recession and credit had dried up but other sources
of funds have remained upbeat throughout this turbulent time.
Also, there is a common understanding that assets and infrastructure act as a defence against torrent time. Even then, the
project finance market has remained stationary and which is
now seemingly heading southwards due to the Basel III and
Solvency II. This has further hampered the prospects of project
finance as it is considered more expensive and less attractive
for banks which require more capital against long term loans.
At the same time, the project finance market has not evolved
itself as other sources of fund which concludes that project
finance is essentially not following the demand trend.
CONCLUSION

Project finance has remained at the heart of developing the oil


and gas industry. It is characterized by a SPV along with a supplier and purchaser. Over the years, there have been innovative
concepts that have overtaken the traditional project finance
techniques. Developing economies have seen a surge in their
project finance market but in recent times, project finance
development has become stagnant. This is partly due to the
higher cost of project finance and the re-aligning of banks due
to recent restructuring of banking norms. This makes project
finance a less attractive and costlier option for entrepreneurs.

ABOUT THE AUTHOR

Muhammad Waqas is a mechanical engineer currently pursuing a degree in energy law. He resides
in the United Arab Emirates where he has gained
experience in the oil and gas sector. His areas of
expertise include energy politics in the Middle East
and European regions.
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T A I L WAT E R C A P I T A L

Tailwater Capital is pleased to announce the formation of

Tailwater Energy Fund II LP


a private equity partnership with
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BUILDING ON PAST SUCCESSES WELL POSITIONED FOR THE FUTURE.
GROWTH CAPITAL FOR THE ENERGY INDUSTRY

Jason Downie | Managing Partner


jdownie@tailwatercapital.com

1503ogfj_49 49

Edward Herring | Managing Partner


eherring@tailwatercapital.com

3/3/15 3:40 PM

Oil and gas security


STANDARDIZATION AND CONTINUITY IN SECURITY RISK ASSESSMENTS IMPROVE DECISION-MAKING
PAUL MERCER, HAWK SIGHT SECURITY RISK MANAGEMENT LTD., LONDON

FOR INTERNATIONAL OIL COMPANIES operating in hostile

environments, corporate security can be a confusing and costly


function, and one that is often outsourced to specialized consultancies at significant cost. The trouble is, ask three different security
consultants to carry out the same Security Risk Assessment (SRA)
and you may well get three different answers.
This lack of standardization and continuity in SRA methodology
creates confusion between those charged with managing security
risk and those who sign off on the budget. So how can security
professionals effectively translate the traditional language of corporate security in a way that aids both understanding and also the
efficient and cost-effective development of corporate security
systems appropriate for their intended use?
Standardized security risk methodology is a three-stage
process:
Develop a working understanding of what is most important
to the operation under review.
Gain an in-depth understanding of the security threat environment in which it operates.
Assess how vulnerable critical elements of the project are to the
threats identified.
Through this process, security professionals can develop a
system that is appropriate for its intended use and flexible enough
to be adapted to an ever-changing security environment. They
also can directly compare projects in different environments so
they can benefit from lessons learned globally.
Furthermore, by ensuring the methodology used is compliant
with enterprise risk management standards, we can begin to
translate the traditional language of security into that of enterprise
risk. This promotes understanding across all business functions
and changes the perception of corporate security from a simple
cost center to one that adds value.
CHANGING THE APPROACH

To benefit from such an approach, some fundamental changes


need to be made.
First, the security risk analyst needs to gain an in-depth understanding of the operation or project being considered in order to
prioritize what supporting assets need protecting the most. These
may be people, physical assets, technology or information itself.
Next we must understand security threats originating from a
human source such as military conflict, crime and terrorism, and
those emanating from a non-human source such as natural disasters
and epidemics.
Most high-profile security threats to international oil and gas
operations are derived from a human source. Louise Richardson,
renowned political scientist and author of What Terrorists Want
50

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says terrorists seek revenge for injustices or humiliations suffered


by their community. To effectively assess the security threat people
bring to your project, both now and in the future, we must consider
not only the action or activity carried out, but also who carried it
out and why.
A security threat assessment must therefore identify:
Threat activity: Kidnap for Ransom of your companys employees,
for example.
Threat actor: Who might carry out such activity?
Threat driver: What motivates the threat actor (perceived lack of
employment opportunity, revenge for the actions of a contracted
corporate security team, etc.)?
Intent: How often has the threat actor carried out the threat activity
or have they only threatened to do so?
Capability: What competency do they have now and in the
future?
Security threats emanating from non-human sources such
as natural disasters, communicable diseases and accidents can
be assessed in a similar assessment process. For example:
Threat activity: Virus outbreak causing serious illness or death to
company employees.
Threat actor: What might be responsible? Middle East Respiratory
Syndrome (MERS).
Threat driver: How might this spread? Through close contact with
an affected individual.
What Potential does the threat actor have to do harm? Up to 300
people may have died of MERS in Saudi Arabia.
What Capacity does the threat have to do harm? MERS has been
reported in over 19 countries.
But a security threat by its very nature, be it human or nonhuman, is not static and must be continually monitored. As a result,
an annual SRA, as many companies prescribe, may still leave your
operations exposed.
To effectively monitor security threats, we must consider events
that might escalate them to a higher level, but also what events
may de-escalate them. For example, security forces firing on a
protest march may escalate the potential of a violent response
from that group, while effective communication with protest leaders may, in the short term at least, de-escalate the potential of a
violent exchange. This type of analysis can help with effective threat
forecasting.
The key challenge facing corporate security professionals is,
however, selling their security threat analysis to the oil and gas
company. The perception of security threats may differ from person
to person due to an individuals experience, background or personal
risk appetite.
To effectively sell a threat analysis, assessment must be put into
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context by creating credible scenarios specific to the operation or project in question.


There is little point specifying terrorism as
a principle risk because it is too broad a
threat. But outlining the risk of an armed
attack by local militia due to an ongoing
dispute on employment opportunities allows us to make the threat more plausible
and to assess if existing control measures
might withstand the incident.

Kurdish oil protection forces.


Photos by Hawk Sight Security Risk
Management Ltd.

ASSESSING VULNERABILITY

Assessing the effectiveness of existing control measures forms a key part of the Vulnerability Assessment.
When assessing vulnerability, security
professionals must:
Consider how attractive the assets might
be to threat actors and how easily they
can be identified and accessed.
Assess how well these assets are already
protected against this threat activity.
Consider how well equipped an organization is respond to an incident, should
it occur despite control measures.

Like a threat assessment, this vulnerability assessment needs to be ongoing to ensure controls not only function correctly
now, but also are still relevant to the everchanging security environment in which
the project operates.
The Statoil The In Anemas Attack report, which followed the January 2013 attack
in Algeria, made recommendations for the
development of a security risk management
system that is dynamic, fit for purpose and
geared toward action. A standardized, open
and well-defined security risk management
methodology will allow both experts and
management to have a common understanding of risk, threats and scenarios and
evaluations of these.
But maintaining this essential process
is no small task and requires specific skillsets and experience. According to the same
report, in most cases security is part of
broader health, safety and environment
positions and one for which few people in
those roles have particular experience and
expertise. As a consequence Statoil overall
has insufficient full-time specialist resources dedicated to security.
Anchoring corporate security in effective
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OIL & GAS FINANCIAL JOURNAL

and ongoing security risk analysis not only facilitates timely and effective decision making
but also introduces a broader quiver of security controls that may not have been considered
as a part of the corporate security system before.
AN INCLUSIVE AND CEREBRAL APPROACH

Before jumping into a one size fits all, military approach to security system design one
which depends on the standard, costly combination of physical security, technology and
armed security personnellet us blow the dust off the SRA and consider how else we
might begin to mitigate the security risks we have identified.
Today, international oil companies engage social scientists to carry out Social Impact
Awareness (SIA) studies to inform Corporate Social Responsibility (CSR) programs. But
how often is such activity considered a part of corporate security? An SIA study may
identify, for example, the key subsistence activity of the locals in a particular Area of Operation (AOO) such as farming, which relies on minimizing the environmental impact of an

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T1: CORRELATION BETWEEN GPI AND INDICES QUANTIFYING MANAGEABLE SECURITY THREAT DRIVERS
Country
Global
Peace
Index

GPI
Ranking

GDP Per
Capita $

GDP pc
Ranking

United
Kingdom

1.63

$35,313

United
States

2.06

Saudi
Arabia

2.22

Algeria
Nigeria
Iraq

Literacy %

Lit.
Ranking

Health
Index

Health
Ranking

Food
Security
Index

Food
Ranking

98

0.859

0.686

$46,521

97

0.815

0.564

$22,934

86

0.730

0.570

2.28

$7,464

78

0.683

0.480

2.76

$3,779

75

0.339

0.233

3.41

$2,152

68

0.607

0.494

operation. Furthermore, it may identify concerns such as grievances


around lack of education opportunities and healthcare. By minimizing the impact on farming and providing schools and healthcare
to the local community, you have effectively suppressed a common
threat driver to operating in developing countries, mitigating a
potential risk before spending a penny on traditional security
measures.
Table 1 draws on information from the UNDP Human Security
Index (HDI). It shows a correlation between the Global Peace Index
(GPI), a leading measure of national peacefulness from the Institute
of Economics and Peace, with indices quantifying some key security
threat drivers that can be managed through effective corporate
social responsibility programs.
A clear correlation can be seen between the level of national
peace and the level of wages, education, health, and food. These
are all services that can be, and in many cases, are included as part
of a CSR program and can have a direct impact on security at the
operational/project level. Taking this more inclusive corporate
security approach at the security planning stage (and gathering
feedback about its effectiveness) means you can reassess security
threats at a tactical and human level and engage with specialists
throughout the organization. This increases your understanding
and veracity of the corporate security function.
For example, I was once asked to use the SRA approach to justify
a considerable increase in the number of armed troops required
to protect a pipeline in Kurdistan, together with the installation of
over 50 kilometers of fencing and surveillance. The threat assessment identified two significant risks, one from a targeted suicide
bomber attack and the other from collateral exposure to an air
attack against militia known to operate near the pipeline.
By mapping threats against critical assets, it was agreed no
number of armed guards would reduce the likelihood of the pipeline
rupturing due to an airstrike. Even the suicide bomber threat would
require fencing at significant standoff, as it is not feasible to identify,
capture, and disarm a potential suicide bomber before
detonation.
So we moved our attention from preventing the threat activity
to responding to it. By adopting a procedural update to response
planning we demonstrated we could lower the risk to a level considered As Low as Reasonably Practicable at a fraction of the cost
52

1503ogfj_52 52

of the physical, technical and manpower controls that were initially


recommended.
Traditional physical, manpower and technological security
remains an essential aspect of operational security, but one that
should perhaps not be considered as the first step in security system
design. Rather, it should be the final step that fills in gaps that
cannot be mitigated through softer security considerations.
Not only can a more inclusive and cerebral approach to security
save you money, but it can also lower the overall project risk profile.
Military inspired security systems focus on military models employing uniformed armed security, centrally trained and entirely
under the command of officers and NCOs.
Contracted armed security, on the other hand, draws on private
security companies that are, in most cases, not under the direct
control of the corporate entity paying for them and who come
from a variety of different backgrounds. The posture of contracted
armed security personal will reflect directly on your company and,
may actually increase your companys target attractiveness. Many
corporate entities have signed on to the Voluntary Principles on
Security and Human Rights, which outlines the huge responsibility
of corporate entities when contracting private armed security
services.
For international oil companies operating in hostile environments, in-depth, ongoing Security Risk Analysis can facilitate an
understanding of the corporate security function and offer ongoing
analysis for effective decision-making. Rather than a military inspired model that may neither be suitable nor entirely under your
control, the more inclusive approach described above can limit
the likelihood of an attack and create cost savings, while also ensuring there is an appropriate response.
ABOUT THE AUTHOR

Paul Mercer is director of Hawk Sight Security Risk


Management Ltd., designer of the Hawk Sight Security
Risk Management solution, and an expert with the
Hostile Environment Liability Protection program.
He is a former Royal Naval Officer who has worked
as a security risk consultant the past 12 years while
living and working throughout the Middle East, Africa, and Asia.
Contact him at info@hawksightsrm.com.
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Oil and gas disclosure rules


PART TWO OF A THREE-PART SERIES: 2013-14 SEC STAFF COMMENTS ON COMPANIES COMPLIANCE
MARC FOLLADORI, ATTORNEY-AT-LAW, HOUSTON

THIS IS PART TWO OF A THREE PART SERIES addressing

publicly-held exploration and production companies compliance


with amended oil and natural gas disclosure rules adopted by
the Securities and Exchange Commission (SEC) in late 2008. Part
one appeared in the February issue of Oil & Gas Financial Journal.
Analysis of compliance efforts have largely been based upon
review of comment letters issued by SECs Division of Corporation Finance, beginning in 2010. Comment letters to companies
reflect the SEC staff s views on whether and to what extent the
companies are complying with SEC regulations and accounting
rules.
PUDS ATTRIBUTABLE TO LOCATIONS
MORE THAN ONE OFFSET AWAY

Disclosures of significant additions to companies PUDs during


the year continued to draw requests for expanded disclosures
about those additions, particularly with regard to companies
active in shale plays. Item 1202(a)(6) of Regulation S-K provides
that (i) for an IPO, or (ii) whenever a company discloses material
additions to its reserve estimates, the company must provide a
general discussion of the technologies used to establish the appropriate level of certainty for its reserves. In 2013-14, this rule
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was particularly relevant for companies having reserves additions


attributable to PUD locations that were more than one offset
location away from a currently-producing well. Where one company disclosed that the significant additions to its reserves in
2012 were related to its drilling activity in the Dimrock field in
Pennsylvania, the staff asked whether the additional reserves
were supported by reliable technologies and whether they included locations that were more than one offset location from
an existing producing well (Cabot Oil & Gas (Aug. 29, 2013)). In
Halcon Resources (Dec. 30, 2013), the staff asked the company
to quantify the total number of PUD locations and associated
net reserves added during fiscal 2012 that were more than one
offset away from an existing producing well, and whether any of
the wells drilled to date that were more than one offset away
from a producing well at the time of their drilling were later found
not to be economically producible. In an IPO, the staff scrutinized
how the company had attributed PUDs to its locations in the
Marcellus Shale and requested additional information on its
methodology used to establish reasonable certainty of economic
producibilty at distances greater than a direct offset away from
a producing well (Antero Resources (July 12 2013)).
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CHANGES IN PROVED RESERVES

One of the substantive areas that drew the most comments from
the staff during the 2013-14 review period was disclosures of material changes from year to year in companies proved reserves. FASB
ASC 932-235-50-4 requires disclosure of the net quantities of a
companys PDs and PUDs as of the beginning and end of each fiscal
year. In addition, FASB ASC 932-235-50-5 requires a tabular presentation of the specific causes of the changes in net quantities of
proved reserves during the year. Changes identified as resulting
from specific causes must be disclosed separately, along with an
appropriate explanation of significant changes. These specific
causes are: (i) revisions of prior estimates; (ii) reserves added by
improved recovery methods; (iii) purchases and sales of minerals
in place; (iv) extensions and discoveries; (v) production and (vi)
conversions to developed reserves (Sanchez Energy (Dec. 24, 2013);
Lucas Energy (Mar. 18, 2014)).
The staff observed that it appeared a company had combined
two specific causes of its changes in its proved reserves (i.e., an
increase resulting from drilling and from reservoir performance)
into one line item in the summary of changes (a Revision in estimate). The staff informed the company to disaggregate the single
item and show separately the changes in reserves caused by each
of the specific causal agents (Kosmos Energy (June 12, 2014)).
Additionally, Item 1203(b) of Regulation S-K requires disclosure
of material changes in PUDs that occur during a year, including
PUDs converted into PDs. The disclosures should be accompanied
by a discussion of the investments and progress (including capital
expenditures) made by the company during the year to convert its
PUDs to PDs.
Revisions to prior reserve estimates were often the catalyst for
comments. In many cases, the staff remarked that insufficient
explanation had been given about companies reasons for their
revisions. If revisions had been disclosed as resulting from well
performance issues, the staff asked for clarification to describe
the reasons for the performance revisions; for example, were the
revisions merely concentrated in just a few wells or else spread
across all proved reserves (Southwestern Energy (Sept. 25, 2013))?
A company disclosed additions to its PUDs for fiscal 2012 partially as a result of restoring to PUD status certain of its reserves
that had been previously downgraded to probable status due to
the five-year rule (WPX Energy (Aug. 23, 2013)). In response to
staff questions, including those about managements drilling plans,
the company explained that the restoration of these reserves to
PUD status was because of changes in its drilling plans and the
passage of time. The staff then requested additional information
describing the circumstances that had led to the initial reclassification of the reserves from PUDs to probable reserves, and an explanation of how those circumstances had later changed to the degree
that it would warrant a finding to support their restoration to PUDs.
Assuming that the reserves had been moved from PUD status to
probable status in the prior period due to economic considerations,
the staff asked for an explanation of how company management
had concluded that as of year-end 2012, the expected rate of return
for those reserves would be sufficient to restore them to PUDs.
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1503ogfj_54 54

The staff also requested that the company discuss the proportion
of the restored PUDs associated with locations scheduled to be
drilled during 2013 that had actually been drilled during 2013 to
the date of the companys response (WPX Energy (Dec. 3, 2013)).
Similarly, where a company reclassified certain reserves as PUDs
that had previously been downgraded from PUDs to probable
status due to a decline in natural gas prices, the staff requested the
company to provide justification for its decision to upgrade, along
with a development schedule and an investment plan for the next
five years that addressed whether the company had the ability to
complete its development plan at current costs (Matador Resources
(Dec. 27, 2013)). The staff requested another company to provide
it with a detailed explanation about its development plan, which
would address the development rate assumptions it had considered
in light of a deterioration in the economic environment, rig cancellations and ceiling test write-downs (Hyperdynamics (Feb. 7, 2014)).
OTHER RESERVES COMMENTS

Non-reserves resources. Under an instruction to Regulation S-K


Item 1202, estimates of oil or gas resources other than reserves
estimates, and any estimated values of those resources, may not
be disclosed in any document publicly filed with the SEC unless
that information is required to be disclosed in the document by
foreign or state law. In Unit Corp. (Sept. 19, 2013), the staff asked
the company to explain its basis for including disclosures of its net
and gross quantities of potential reserves, citing the instruction.
Another company owned properties in the Cook Inlet region of
Alaska; the company referenced in its most recent annual report
positive statements about the region from a publicly available
report of the US Geologic Survey. The report included a 2011 Cook
Inlet region assessment that attributed to the region estimated
mean undiscovered technically recoverable reserves of 599 million
bbls of oil and 19 tcf of natural gas. The staff pointed out the instructions general prohibition against disclosing resources other
than reserves, and asked the company to remove the language
from its filing (Miller Energy Resources (Feb. 21, 2014)).
Mineral interests. Where a company owned mineral interests
covering substantial acreage in properties operated by a third party,
the staff inquired the company about the PUDs booked with respect
to that acreage and how the company could establish the reasonable certainty of the scheduled recovery of those PUDs, since the
company had no control over the PUDs development other than
under any development provisions in the relevant lease agreement
(Viper Energy Partners (May 22, 2014)).
Net profits interests and production payments. The 2013-14
review period featured comments about conveyances by companies
of net profits interests (NPIs) and production payments, and
whether they had continued to book proved reserves attributable
to the interests that had been conveyed. In RSP Permian Inc. (Nov.
4, 2013), the staff asked the company whether any reserves attributed to certain NPIs that the company had conveyed to a third
party in 2011 were included in its disclosed proved reserves estimates for year-end 2012 and at June 30, 2013. The company responded that it had correctly included in its estimates the net cash
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flows and reserves associated with the NPIs, because the total
cumulative revenues credited to the NPIs had not yet exceeded
the cumulative direct operating expenses and capital expenditures
charged against the cumulative revenues.
In Endeavour International (Sept. 19, 2013), the staff noted the
companys sale during 2013 of a monetary production payment
for $107.5 million, and requested a detailed explanation of the
transaction, including addressing whether the oil and gas quantities associated with the production payment would be included
as part of the companys year-end 2013 disclosed proved reserves.
The company replied that the transaction was classified as a
monetary (and not volumetric) production payment. As such, the
companys obligation under the production payment was to repay
specified dollar amounts, and not to repay in a specified quantity
of future production. Citing relevant accounting literature, the
company asserted that all reserves estimates and production data
with respect to the monetary production payment would be reported with those of the company; therefore, the associated oil
and gas quantities would be included in its proved reserves disclosures at December 31, 2013.
Probable and possible reserves. Finally, there appeared to be
more disclosures of estimated unproved reserves probable and
possible reserves contained in filings for 2013-14. Where estimated
unproved reserves disclosures appeared in filings, companies often
failed to include disclosures of all matters required by Regulation
S-K with respect to probable and possible reserves. Probable and
possible reserve estimates disclosures must include much of the
same categories of information as are applicable to proved reserves
under Regulation S-K Item 1202. These requirements include
summary tabular information showing both developed and undeveloped probable and possible reserves, categorized as either
developed or undeveloped, classified by final product sold (oil,
natural gas, NGLs, synthetic oil, etc.) and in the same geographic
detail as is required for proved reserves. The staff noted one companys failure to disclose its probable and possible reserves as
developed or undeveloped as required by Regulation S-K Item
1202(a) (Sanchez Energy (Dec. 24, 2013)).
Where companies disclose probable and possible reserves,
Regulation S-K Item 1202 mandates that they also discuss the
uncertainty related to estimates of probable and possible reserves
(Antero Resources (Aug. 16, 2013)). The staff has stated, for example,
that companies should address the degree of certainty regarding
the underlying cash flows for probable and possible reserves (and
their associated risks) and discuss the assumptions used by management in their calculation. Because the categories of proved,
probable and possible reserves estimates each have different risk
profiles due to the disparities in their respective levels of certainty,
it is not appropriate for a company to add the individual categories
together and then present the sum as one total reserves estimate
(Dune Energy Inc. (Aug. 5, 2013 and Sept. 6, 2013)).
NGLS AS SEPARATE PRODUCT TYPE

One of the most recurring comments since 2012 has been that
companies should report their natural gas liquid (NGLs) reserves
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and production volumes separately from the reserves and production data of their other hydrocarbons. FASB ASC 932-235-50-4
provides that if a companys NGL reserve quantities are significant,
then information regarding its NGL reserves must be disclosed
separately and not aggregated with its crude oil quantities. Also,
Regulation S-K Item 1202(a) requires disclosure of production
volumes broken down by final product sold for each of the three
prior fiscal years. Item 1204(b) mandates disclosure, broken down
by geographical area, of (1) the average sales price per unit of oil,
gas and other products produced and (2) the average production
cost, not including ad valorem and severance taxes, per unit of
production. The staff has made it very clear in its comments that
it considers NGLs to be a separate product type for disclosure
purposes given the generally wide price differentials between NGLs
and crude oil.
Staff guidance as to whether NGL reserve quantities are significant is not clear (Southwestern Energy (July 10, 2014)). Companies contending that their NGL reserve quantities were not
significant have generally lost their arguments (Enduro Royalty
Trust (Dec. 30, 2013); Rex Energy (Dec. 30, 2013)). However, one
company, contending that Regulation S-K Item 1202(a)(4) only
requires separate disclosures of material reserves by product type,
argued that its NGL reserves and production were not material.
The company represented in its response that its NGLs represented
only approximately 4% of its total estimated proved reserves, 7%
of its total estimated liquid reserves, 3% of its total production and
less than 2% of its total oil and gas revenues for fiscal 2012. The
staff appeared to concede the point, although the company did
confirm in its response that it would disclose separately information required for NGLs under Items 1202 and 1204 of Regulation
S-K for any annual period after 2012 in which NGLs were material
to its estimated proved reserves and/or production (EPL Oil & Gas
(Dec. 19, 2013); response letter (Jan. 21, 2014)).
Under an instruction to Regulation S-K Item 1204, reported
volumes of natural gas produced should include only the marketable production of natural gas on an as sold basis, and gas consumed in operations should be omitted from the production
quantities. Thus, where a wide difference existed between a companys disclosed historical average natural gas price ($3.67/Mcfg)
and its gas price used for purposes of its proved reserves determination ($5.03/Mcfg), the staff inquired whether ethane rejection
by the gas processor had produced any significant effect that resulted in such a variance (Viper Energy Partners (March 21, 2014)).
ABOUT THE AUTHOR

Marc Folladori has been an M&A and securities attorney in Texas since 1974, and has extensive experience representing energy companies and firms engaged in energy investment and finance. Before his
retirement from Mayer Brown LLP in 2014, he served
as the head of the firms Global Energy Practice. The
author wishes to acknowledge the research and other contributions in connection with this article made by Amelia Xu while she
was an associate at Mayer Brown LLP during 2014.
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DEAL MONITOR

Deal activity slows to a crawl,


with recovery expected in 2nd half
BRIAN LIDSKY, PLS INC., HOUSTON

PLS REPORTS M&A ACTIVITY has predictably slowed to a

crawl following the oil price downturn that began last summer and accelerated towards years end, cutting oil prices
by more than half. Spot WTI reached a high of $107.95 on
June 20, 2014 before tumbling to a low of $44.08 on January
28, 2015. The full impact of this down cycle is reflected in
this months tally of deals. From January 17 to February 16,
2015, there were just 15 deals (with values disclosed) struck
for a total of $1.4 billion. This is down substantially from 43
deals and $13.4 billion in deal value for the similar period a
year ago. In fact, the first quarter of 2015 has the potential
to be the slowest upstream deal market since at least 2007,
eclipsing the low-water mark of $19 billion (121 deals) in
upstream transactions in Q3 2009 a period following the
market meltdown in late 2008.
The downturn has stretched across the globe.This

months deal values regionally tally $592 million in the US


(6 deals), $147 million in Canada (4 deals) and $681 million
internationally (5 deals). The reasons are self-evident as
the industry recalibrates its cash flows. Already, according
to research by Tudor, Pickering, Holt & Company, North
American independents have slashed 2015 capital budgets
by nearly 40%. The impact of this spending slowdown is expected to decrease production from this group of companies from 9.9 MMboe/d in Q4 2014 to 9.7 MMboe/d average
in 2015.
As in past cycles, the initial reaction by companies to
sharp down cycles in commodity prices is to reign in discretionary capital spending. This impacts exploration,
lease acquisitions, major project commitments and acquisitions. Management is laser-focused on their highest return projects to maintain cash flows as well as strengthen

PLS INC. MONTHLY DEAL MONITOR - 01/17/15- 02/16/15


US TRANSACTIONS

Date Announced

Buyer

Seller

12-Feb-15

Undisclosed

Energen

Asset Location
Rockies: NM, CO

30-Jan-15

Stranded Oil Resources Corporation

US Government

Rockies: Wyoming

22-Jan-15

Undisclosed

American Eagle Energy

Bakken: North Dakota

19-Jan-15

Matador Resources

Heyco Energy Group

Permian: SE New Mexico

Asset Location

INTERNATIONAL TRANSACTIONS

Date Announced

Buyer

Seller

19-Jan-15

Undisclosed

Lightstream Resources

Canada: AB, BC

22-Jan-15

Maple Leaf Royalties

Maple Leaf 2012 Energy Income LP

Canada: Multiple

9-Feb-15

Raging River Exploration

Surge Energy

Canada: Viking

5-Feb-15

TORC Oil & Gas

Undisclosed

Canada: Saskatchewan

10-Feb-15

Petrogrand AB

Ripiano Holding

Russia

5-Feb-15

Seplat Petroleum

Chevron

Nigeria

5-Feb-15

Seplat Petroleum; Undisclosed

Chevron

Nigeria

20-Jan-15

PetroRio SA

Shell

Brazil

PLS Inc. Validity of data is not guaranteed and is based on information available at time of publication.
Prepared by PLS Inc. Source: PLS Derrick Global M&A Database. For more information, email memberservices@plsx.com

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DEAL MONITOR

the balance sheet. In these early months of the down cycle,


simply put sellers and buyers are too far apart on future
price expectations to strike M&A deals. Once the dust
clears and there is more certainty about global oil supply
and demand, these expectations will recalibrate and the
M&A markets will begin functioning at a normal pace.
In contrast to 2008/2009, this particular down cycle is
limited to the industry itself while the financial sectors remain in relatively healthy shape. There is ample capital
available for deals, particularly in the private equity sector
where TPH estimates a record of nearly $100 billion of dry
powder (assuming 50/50 debt/equity) is ready to be put to
work. Traditionally, private equity has been deployed in the
deal markets to back new management teams launching
an acquisition-oriented growth strategy. In this current
stalled market, private equity outfits are finding new ways
to deploy capital. An example is the announcement on January 2nd by Linn Energy that the company had received a
five-year, $500 million commitment from GSO Capital Partners to help fund Linns drilling program.
There is little doubt that once the dust settles, the M&A
markets will gain momentum as companies re-size their
portfolios to meet the shifted paradigm of cash flows. In
part, the jump start to a higher sustained deal flow will be
driven by creditors as they go through their spring borrowing base redetermination processes. Also, once the markets
gain confidence that, at a minimum, a bottom has been

achieved on oil prices, then buyers and sellers will at least


have a floor to begin narrowing the spread on price expectations for asset valuations.
Looking at this months activity, it is noteworthy that
there have not been any substantial corporate transactions
indicative of the fact that creditors are still providing
some rope to management to work through this cycle. The
largest US deal this month is Energens $395 million sale of
its natural gas assets in the San Juan Basin of New Mexico
and Colorado to a private buyer. According to Energen, the
assets cover 205,000 net acres with 414 bcfe proved (84%
gas) and another 1.8 tcfe of probable, possible and contingent resources. Production averaged 108 MMcfe/d in 2014.
Energen retained a large Mancos oil play (91,000 net acres)
in the same basin for future growth.
In Canada, Torc Oil & Gas struck the months largest
deal for $102 million by purchasing light oil assets producing 1,550 boe/d (94% oil) with 4.4 MMboe of proved reserves located in southeastern Saskatchewan. Torc is paying for the assets entirely with equity, which will allow the
seller to retain upside as the markets recover.
Internationally, the largest deals were in Nigeria where
Chevron sold 40% WI in producing OML 55 for $235 million
and a 40% interest in OML 53, which is under development,
for $255 million. The buyer is Seplat Petroleum, a local Nigerian oil and gas company.

Proved Reserve
Value ($MM)

Non Proved
Reserve Value
($MM)

Proved
Reserves
(MMBoe)

Production
(Boe/D)

Category

Deal Type

Hydrocarbon

Deal Value
($MM)

Conventional

Property

Gas

$395

$395

69.0

18,082

Conventional

Property

Oil

$45

$45

NA

240

Unconventional

Property

Oil

$10

$10

NA

120

Unconventional

Acreage

Oil + Gas

$137

$36

$101

1.3

530

$587
4

$486

$101

70.3

18,972

Total Transaction value


Number of Transactions

Category

Deal Type

Hydrocarbon

Deal Value
($MM)

2P Reserve
Value ($MM)

Non 2P Reserve 2P Reserves


Value ($MM)
(MMBoe)

Production
(Boe/D)

Conventional

Royalty

Oil + Gas

$10

$3

$7

NA

61

Unconventional

Royalty

Gas

$7

$7

0.2

153

Unconventional

Property

Oil

$28

$28

2.4

510

Conventional

Property

Oil

$102

$102

5.0

1,318

Conventional

Corporate

Oil

$21

$21

8.9

735

Conventional

Development

Oil + Gas

$255

$255

NA

NA

Conventional

Property

Oil + Gas

$235

$235

NA

NA

Conventional

Property

Oil

$150

$150

NA

NA

Total Transaction value


Number of Transactions

$810
8

$802

$7

16.6

2,777

Note: Canada transactions assume 20% royalty, unless disclosed.

MARCH 2015

1503ogfj_57 57

OIL & GAS FINANCIAL JOURNAL

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57

3/3/15 3:41 PM

INDUSTRY BRIEFS

CHEVRON SETS 2015 BUDGET 13% LOWER


THAN 2014 TOTAL INVESTMENTS
Oil and gas giant Chevron Corp. has set its 2015 capital and
exploratory investment budget at $35.0 billion. Included in the
2015 program are $4.0 billion of planned expenditures by affiliates, which do not require cash outlays by Chevron. The 2015
budget is 13% lower than total investments for 2014. While the
$31 billion of cash capital expenditures is in line with estimates
compiled by Jefferies, the analysts assumed a total capital
budget of $36.5 billion. For upstream, approximately $12 billion
of planned upstream capital spending is directed at existing
base producing assets, which includes shale and tight resource
investments. Roughly $14 billion is related to the construction
of major capital projects already underway, primarily LNG and
deepwater developments. Global exploration funding accounts
for approximately $3 billion. Roughly 75% of affiliate expenditures are associated with investments by Tengizchevroil LLP
in Kazakhstan and Chevron Phillips Chemical Company LLC
(CPChem) in the United States.
OWL CLOSES $250M CREDIT FACILITY
Oilfield Water Logistics (OWL), a Natural Gas Partners (NGP)
portfolio company providing water infrastructure and services
to the energy industry, has secured a $250 million untapped
credit facility with Texas Capital Bank. OWL currently has operations in the Permian (Delaware/Midland), Haynesville/Cotton
Valley, Powder River, Niobrara, DJ, Uinta and Piceance basins,
with 27 oilfield water facilities in operation or development and
an extensive network of water pipelines and surface use
agreements.
GOODRICH REVISES 2015 BUDGET
Based on current commodity prices, Goodrich Petroleum Corp.
has revised its preliminary capital expenditure budget for 2015
to $90 $110 million, comprised of $80 $100 million of drilling
and completion capital expenditures and approximately $10
million of leasehold and infrastructure expenditures. The
budget is 43% below the mid-point of prior guidance (12/10/14)
and 70% below estimated 2014 expenditures, noted Stifel
analysts. The company noted it will monitor capital expenditures
on a quarterly basis and maintain flexibility to accelerate capital
expenditures with improvement in oil prices and the monetization of certain assets. Oil directed capital is estimated to be
approximately 91 93% of the total drilling and completion
budget, with the entire oil-directed allocation to the Tuscaloosa
Marine Shale, where the company is seeing reductions in well
costs. Stifel analysts expect Goodrich to retain more than
250,000 net acres in the play, including 157 net core acres. Oil
production volumes are expected to average approximately
4,800 5,200 barrels per day for 2015, which includes completion deferrals into the second half of 2015. Natural gas volumes
are expected to average approximately 23,000 26,000 Mcf
per day.

58

1503ogfj_58 58

OCEANEERING TO ACQUIRE C & C TECHNOLOGIES


C & C Technologies, an international provider of survey and
mapping services, has agreed to be acquired by Oceaneering
International Inc. The transaction is anticipated to be completed
in early April 2015, subject to customary closing conditions. C
& C Technologies is expected to retain its name and continue
to be headquartered in Lafayette, Louisiana. Simmons & Company International served as financial advisor to C & C
Technologies.
NGL TO ACQUIRE MAGNUM NGLS
NGL Energy Partners LP has entered into a definitive purchase
agreement with Magnum Development LLC, a portfolio company of Haddington Ventures LLC and other Haddingtonsponsored investment entities, to acquire Magnum NGLs LLC
for total consideration of $280 million. Magnum owns and operates a natural gas liquids storage facility with multiple existing
salt caverns and a potential capacity of greater than 10 million
barrels. The facility is located southwest of Salt Lake City, Utah
with rail and truck access to Western US markets. NGL Energy
Partners LP is a Delaware limited partnership. NGL owns and
operates a vertically integrated energy business with five primary
businesses: water solutions, crude oil logistics, NGL logistics,
refined products/renewables and retail propane. The transaction is fully-financed and will be paid through a combination
of $80 million in cash and $200 million in NGL Common Units
issued to the seller and subject to certain lock-up provisions.
The consummation of the transaction is subject to customary
closing conditions and is expected to close in the first quarter
of 2015. Simmons & Company International served as the exclusive financial advisor to Magnum and Haddington.
QUICKSILVER RESOURCES DECIDES
NOT TO MAKE INTEREST PAYMENT
Quicksilver Resources Inc. said February 17 that the company
has decided not to make the approximately $13.6 million interest payment due Feb. 17 on its 9.125% senior notes due in
2019. Under the terms of the indenture governing the 2019
Notes, the Fort Worth, Texas-based company has a 30-day
grace period before the failure to make the interest payment
results in an event of default. Quicksilver noted in a press release
that it believes it is in the best interests of its stakeholders to
continue to focus on actively addressing the companys debt
and capital structure and intends to continue discussions with
its creditors during the 30-day grace period. If the company
does not make the interest payment before the end of the
grace period, the trustee or the holders of at least 25% in the
aggregate principal amount of the outstanding 2019 Notes
may declare the principal and accrued interest for all 2019
Notes due and payable immediately. The acceleration of the
principal under the 2019 Notes would also result in defaults
under the terms of other indebtedness of the company. Quicksilver has retained Houlihan Lokey Capital Inc., Deloitte Transactions and Business Analytics LLP, and other advisors to assist
WWW.OGFJ.COM |

OIL & GAS FINANCIAL JOURNAL

MARCH 2015

3/3/15 3:41 PM

INDUSTRY BRIEFS

with the evaluation of the companys options to address nearterm debt maturities, enhancement of its liquidity position, and
evaluation of strategic alternatives. The company stated there
are no assurances it will be able to successfully restructure its
indebtedness, improve its short- and long-term liquidity position, or complete any strategic transactions in a timely manner
or at all. Accordingly, the company said it may need to seek
voluntary protection under chapter 11 of title 11 of the US Code
to restructure its capital structure.
RIGNET REALLOCATES RESOURCES
RigNet Inc., a Houston-based provider of digital technology
solutions to the oil and gas industry, said Feb. 19 that it will
shift resources from its US land rig communications business
and certain back office support functions to expand its
global sales team and boost its business development and
global expansion initiatives. RigNet expects to take a
one-time charge of approximately $6.2 million in the first
quarter of 2015 for facilities closures, employee severance
expenses, and related matters. Separately, with the downturn in the oil and gas industry, RigNet also anticipates
taking a pre-tax, non-cash goodwill impairment charge of
approximately $2.7 million in the fourth quarter of 2014
related to RigNets Telecommunications Systems Integration
business segment.
BAYSIDE COMPLETES $5M SALE OF SUBSIDIARY
Bayside Corp. has completed the 100% sale of the common
stock of Bayside Petroleum Co. Inc. to Technis Energy Ltd.
Bayside Petroleum Co. is now a wholly owned subsidiary of
Technis Energy Ltd. Consideration for the sale includes $5 million of preferred stock of Bayside Petroleum Co. and cash
consideration. Common stock shareholders of Bayside Corp.
will also receive a stock dividend of Bayside Petroleum Co. Inc.
Upon approval of the corporate action, and the appointment
of the new Bayside Petroleum Co. management team, Bayside
Petroleum Co. will seek to file a registration statement to initiate the quotation of its common stock on the OTC Bulletin
Board.
BLACKEAGLE ACQUIRES ASSETS OF POLARIS DRILLING
Blackeagle Energy Services, which provides oil and gas construction and fabrication, has purchased the assets of Polaris
Drilling Inc., a company specializing in directional drilling. The
acquisition of Polaris Drilling, and its capabilities in trenchless
underground utility construction, complements Blackeagles
capabilities in pipeline, facility, maintenance, and fabrication
services. The new company will operate under the name Polaris
Drilling and will be led by Jeramy Wulkan, Polaris former
president and owner.
SILICON VALLEY BANK OPENS HOUSTON OFFICE
Silicon Valley Bank has opened an office in Houston in order
to support the growing number of technology, life science, and
MARCH 2015

1503ogfj_59 59

OIL & GAS FINANCIAL JOURNAL

WWW.OGFJ.COM

Silicon Valley Bank


provides services to
more than 50% of all
venture capital-backed
companies in the US.

energy companies, as well as their investors, in the region. Silicon


Valley Bank provides services to both private and public companies of all sizes, including more than 50% of all venture capitalbacked companies in the US and two-thirds of the venture
capital firms. Blake English serves as managing director for
Silicon Valley Bank in Houston. Silicon Valley Bank has been
helping innovative companies succeed for more than three
decades and in Texas specifically for nearly 20 years. The energy
and growth in the Houston market has reached a milestone
and were thrilled to be involved, Blake said. In Texas, the
Houston office joins SVB locations in Austin and Dallas. The
team in Texas has grown to nearly 30 banking professionals
providing commercial banking, including specialized lending,
client services, analytics, and private equity services.

LUCAS ENERGY AMENDS LOAN AGREEMENT


Lucas Energy Inc.s lender has agreed to amend the terms of
its loan agreement and further granted an optional extension
through Sept. 13, with a second extension option through Oct.
13, in order to facilitate the companys proposed business
combination with Victory Energy Corp. Under the terms of the
amended agreement, Lucas will pay interest at a 12% rate
beginning in April, and interest for January, February, and March
will be added to the outstanding balance of the loan. If the
company elects to extend the maturity of the loan through
September or October, a 2% extension fee will be added to
the interest rate during the extension period. Lucas also agreed
to pay all current and past-due legal and administration fees
and other costs associated with the amended terms. The lender
will release a portion of the collateralized oil and gas properties
securing the loan so these properties can be transferred to an
affiliate of Victory Energy and funded by Victory and its affiliates
prior to the consummation of the business combination. If the
business combination does not occur as contemplated, then
the lender will have the right to receive a compensation payment from Victory.
REPUBLIC SERVICES ACQUIRES TERVITA
Republic Services Inc. has completed its acquisition of Tervita
LLC, an environmental waste solutions provider serving oil and
natural gas producers in the US. Tervitas assets complement
Republics existing E&P business, and provide customers with
vertically integrated oilfield waste services across a geographic
footprint spanning domestic basins, including the Permian,
Eagle Ford, and Bakken shale plays.
59

3/3/15 3:41 PM

ENERGY PLAYERS

Schock

Gordon

Brown

Barr

STATOIL NAMES SAETRE PRESIDENT, CEO


Statoil has appointed Eldar Saetre as president and
CEO of the company. Saetre has been acting as president and CEO since October following the departure
of former CEO Helge Lund. With 35 years of experience in the oil and gas industry, Saetre holds extensive
operational and financial experience with Statoil and
has served as a member of the companys corporate
executive committee since 2003. He started as CFO,
and later became executive vice president for marketing, processing and renewable energy. Saetres annual
fixed salary will be 7.7 million NOK, whereof 5.7 will
be pensionable income. He will participate in Statoils
programs for annual variable pay and long term incentives, as previously established for the CEO position
and described in the boards statement on executive
remuneration. Saetre will keep his existing pension
agreement, which gives him the right to resign at 62.
JACKSON KELLY EXPANDS LAND
AND NATURAL RESOURCE PRACTICE
Andrew N. Schock has joined Jackson Kelly PLLC as
an associate in the Land and Natural Resource Development Practice Group in the Akron, Ohio, office. He
focuses his practice in the areas of oil and gas and
real estate. Schock handles title examinations and the
preparation of certified oil and gas title opinions. He
is also experienced in matters involving mineral transactions and acquisitions, including the coordination
and performance of due diligence and title defect
curative work. Prior to joining the firm, Schock served
as a landman for an energy consulting group. Schock
graduated from The University of Akron School of
Law, where he received CALI Awards for Excellence
in Constitutional Law and Securities Regulation. He
holds a bachelors degree from The Ohio State University. He is admitted to practice in Ohio.
ATLANTIC OFFSHORE RESCUE NAMES UK
MANAGING DIRECTOR
Standby vessel operator Atlantic Offshore Rescue has
appointed a new managing director for its UK division
to lead the organization from its Aberdeen base.
Matthew Gordon joined the company at the beginning of 2015, replacing John Bryce, who is retiring.
Bryce will continue to be involved in Atlantic Offshore
Rescue in a consultancy capacity. Gordons previous
roles include a general manager position within Viking
Seatech and an eight year employment span with
Subsea 7. Atlantic Offshore Rescue is part of the
Atlantic Offshore Group, which is headquartered in
Norway. Atlantic Offshore Rescue provides multi-role
offshore and emergency rescue and response vessels
for many of the oil majors operating in the North Sea.

60

1503ogfj_60 60

REX ENERGY NAMES NEW CFO


Rex Energy Corp. has appointed Thomas Rajan as
CFO. Rajan brings almost 30 years of business and
finance experience to his role at Rex Energy, with 20
years in oil and gas finance, credit, and capital markets
roles. Most recently, Rajan served as the managing
partner of High View Energy LLC. He was previously
managing director of KeyBanc Capital Markets in
Dallas, where he spent eight years in investment and
corporate banking roles, ultimately leading the oil
and gas investment banking and corporate banking
practices. While at KeyBanc, Rajan assisted Rex Energy
through the companys IPO and subsequent equity
raising transactions, and he has advised Rexs management on a number of strategic acquisition and divestiture projects since 2006.
LEGACY RESERVES DETAILS CEO TRANSITION
As part of a previously announced change in leadership, Cary D. Brown, chairman, president and CEO
of the general partner of Legacy Reserves LP, has
submitted his resignation as president and CEO effective March 1, 2015. As anticipated, the board of
directors of Legacys general partner has appointed
Paul T. Horne, currently Legacys executive vice president and COO, as the new president and CEO upon
Browns resignation. Brown will continue to serve as
Legacys chairman of the board. He has served as CEO
of Legacys general partner and as a member of its
board of directors since Legacys formation. Horne is
a founding member of Legacys executive management team, and was added to the board of directors
of Legacys general partner in December 2014. He
has managed operations at Legacy and its predecessor companies since 2000. Previously, he worked for
Mobil E&P US Inc. in a variety of petroleum engineering and operations management roles, primarily in
the Permian Basin.
INTELLECTUAL PROPERTY LITIGATOR
JOINS KING & SPALDING
John H. Barr, Jr., a commercial litigator who focuses
on intellectual property, energy, and business litigation, has joined King & Spalding as a partner in the
firms intellectual property practice in Houston. Barr
joins King & Spalding from Bracewell & Giuliani, where
he was a partner and co-head of the intellectual property litigation practice. Barrs IP litigation experience
includes patent infringement, Abbreviated New Drug
Application litigation, trade secret and trademark
infringement cases. In addition, he represents energy
clients in environmental matters such as claims related
to oil and gas development, particularly hydraulic
fracturing, and, for the past two decades, has repreWWW.OGFJ.COM |

OIL & GAS FINANCIAL JOURNAL

MARCH 2015

3/3/15 3:41 PM

ENERGY PLAYERS

sented clients in a variety of disputes including breach of


contract, fraud and tort claims in state and federal courts. Barr
also handles international arbitrations in the United States and
internationally, and has briefed and argued appeals in a number
of state and federal courts. He received a bachelors degree
from the University of the South and his JD from Texas Tech
University School of Law.
OURADA SUCCEEDS FOEHR AT CHEVRON
Chevron Corp. has named Jeanette L. Ourada as corporate
vice president and comptroller effective April 1. Ourada succeeds Matthew J. Foehr, who will retire from the company
March 31 after 33 years of service. In her new role Ourada will
lead corporate-wide accounting, financial reporting and analysis,
and internal controls. Additionally she will oversee Finance
Shared Services, the organization she has led since July 2013.
Since joining Chevron as part of the Unocal acquisition in 2005,
Ourada has held a series of leadership roles within the finance
organization. Before assuming her current role as the general
manager of Finance Shared Services, Ourada served as assistant
treasurer, operating company support and intercompany financing. From 2009 to 2012 she was general manager of investor
relations. Foehr joined Chevron in 1982. Since that time, he





advanced through a number of finance positions of increasing


responsibility in corporate finance as well as in Chevrons operating lines of business. In 2007, he assumed the top financial
role in Chevrons Global Upstream and Gas business. He was
named to his current position in 2010.
MEO AUSTRALIA NAMES MANAGING DIRECTOR
MEO Australia Limited has appointed its CEO, Peter Stickland,
to the company board, assuming the role of managing director
and CEO. Stickland has over 20 years of global experience in
oil and gas exploration. He was CEO of Tap Oil Ltd. from 2008
until late 2010. Prior to joining Tap Oil, he served in various
technical and management roles at BHP Billiton.
IEA NAMES NEXT EXECUTIVE DIRECTOR
The Governing Board of the International Energy Agency (IEA)
confirmed the appointment of Dr. Fatih Birol as the next executive director of the agency. He will succeed Maria van der
Hoeven, who will complete her four-year term on August 31,
2015. Renowned in the energy field, Dr. Birol joined the IEA in
1995 and has risen to hold the positions of Chief Economist
and Director of Global Energy Economics. In this role, he
oversees the IEAs flagship World Energy Outlook publication.

PROFESSIONALS: ENERGY INDUSTRY


CONSULTANTS IN AREAS OF
RESERVOIR ENGINEERING, GEOSCIENCE &
ECONOMIC ANALYSIS
Since the 1920s





    

     


  
 





www.ralphedavis.com
Since 1924 the Ralph E. Davis firm has provided independent consulting
services in the evaluation of oil and gas reserves to the international energy
industry. Evaluations are based upon the latest technical applications tempered
by a knowledge gained through experience and a professional integrity reflected
in the firms acceptance by the regulatory and financial institutions throughout
the industry.
The Davis firm will work with its clients to complete a timely, reliable and fact
based analysis of the available data.

   

    


    

 

    

## #! "

MARCH 2015

1503ogfj_61 61

OIL & GAS FINANCIAL JOURNAL

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1717 ST. JAMES PLACE, SUITE 460


HOUSTON, TEXAS 77056
TEL: 713-622-  
-626-3664

61

3/3/15 3:41 PM

ENERGY PLAYERS

van Zadelhoff

van Kemenade

Payne

He is also the founder and chair of the IEA Energy


Business Council, which provides a forum to enhance
co-operation between the energy industry and energy
policy makers. Earlier in his career, Dr. Birol served in
the Secretariat of the Organisation of the Petroleum
Exporting Countries (OPEC) in Vienna and has been
a member of the UN Secretary-Generals High-Level
Group on Sustainable Energy for All. A Turkish citizen,
Dr. Fatih Birol was born in Ankara in 1958. He earned
a BSc degree in power engineering from the Technical
University of Istanbul. He received his MSc and PhD
in energy economics from the Technical University of
Vienna.
DLL FORMALIZES EXECUTIVE BOARD
DLL, a global provider of asset based financing solutions, has formalized an executive board. After the
appointment of CEO Bill Stephenson in June 2014,
Rob van Zadelhoff has been appointed as chief commercial officer and Carlo van Kemenade will take up
the role of COO. Although Rob van Zadelhoff joined
DLL in 2014 as chief commercial officer, the regulatory
authorities (DNB) have now officially approved Van
Zadelhoffs appointment. As CCO he will lead DLLs
commercial strategy across 36 countries around the
globe and will be based at the Eindhoven Headquarters. Van Zadelhoff, law graduate, has served in a
number of international key senior positions within
Rabobank since 1991. Most recently he was Chief
Commercial Officer West in the Management Team
Rural & Retail of Rabobank International, responsible
for its activities in North and South America. Carlo
van Kemenade, who has been with the company for
25 years and has served as a member of the executive
board since March 2013, was most recently responsible
for DLLs activities in the US, Canada, Mexico, Brazil,
Chile, and Argentina. He holds an MBA from Nyenrode
Business University. Frans Overdijk will continue his
role as chief financial and risk officer and will continue
to serve as a member of the executive board.
COASTAL FLOW NAMES PAYNE VP, DIGITAL OPS
The Coastal Flow Measurement family of companies
has appointed Jayson Payne as vice president of
digital operations. Payne has been with Coastal Flow
for 16 years. Most recently, as iMeasurement manager,
he spearheaded the integration of all company measurement functions, while also directing field technicians and internal IT operations, and has also been
instrumental in the development of the BirdDog Information Systems division. In his new role, Payne will
be responsible for coordinating the companywide
deployment and use of all digital information systems,
while continuing to lead IT and field services and

62

1503ogfj_62 62

remaining involved with BirdDog Information


Systems.

UK OIL & GAS APPOINTS NEW CEO


UK Oil & Gas Plc has named Stephen Sanderson as
CEO. The role is a non-board position. Sanderson is
a petroleum geologist with over 30 years global upstream energy sector experience. He has been directly
involved in numerous commercial conventional hydrocarbon discoveries, including the giant Norwegian
Smrbukk-Midgard field complex for ARCO (now BP).
In a variety of senior management roles he has operated exploration and new venture programs for ARCO,
the large independent Wintershall AG and three junior
start-ups. His subsurface and operated management
experience encompasses Africa, North Sea/Norway,
Europe, S. America and the Middle East. He has also
led and managed the appraisal of several UKCS oil
and gas fields for ARCO (now BP) in the UKCS, Netherlands and Algeria. Via his recent management roles
in Delta Hydrocarbons, ASP and as an independent
consultant, he has been involved in the evaluation
and acquisition or divestment of many upstream producing, appraisal and exploration portfolios containing
over 170 fields. Sanderson is a graduate and associate
of the Royal School of Mines, Imperial College,
London.
SANDRIDGE APPOINTS TURK EVP, COO
SandRidge Energy Inc. has appointed Steve Turk to
the role of executive vice president and COO, effective March 2. Turk comes to SandRidge with more
than 30 years of experience in the exploration and
production industry, at both private and publicly held
companies, including having most recently served as
COO at HighMount Exploration & Production LLC.
Previously in his career, Turk was vice president of
operations for the Southern Division of Chesapeake
Energy. He also held various operations and management positions for Equitable Production Co., Ziff Energy Group, and Cabot Oil and Gas. He holds a bachelors degree in geology from Edinboro University, a
bachelors degree in petroleum and natural gas engineering from Pennsylvania State University, and an
MBA from Oklahoma City University.
OCEANEERING NAMES NEW PRESIDENT, COO
Oceaneering International Inc. has appointed Roderick
A. Larson as president and COO. Larson has been
with Oceaneering since May 2012, serving as senior
vice president and COO with worldwide responsibility
for all of Oceaneerings oilfield business operations.
Previously, Larson was with Baker Hughes Inc. for more
than 20 years.
WWW.OGFJ.COM |

OIL & GAS FINANCIAL JOURNAL

MARCH 2015

3/3/15 3:41 PM

Companies mentioned in this issue of Oil & Gas Financial Journal are listed in
alphabetical order with advertisers in boldface type. The index is provided as
a service. The publisher does not assume any liability for errors or omission.

COMPANY

PAGE

Abu Dhabi Fund for Development

44

Accenture

Access Midstream

13

Addax Petroleum

ADNOC

11

Antero Resources

14,53

COMPANY

COMPANY/ADVERTISER INDEX
PAGE

COMPANY

PAGE

COMPANY

PAGE

Delta Hydrocarbons

62

Kosmos Energy

54

Republic Services Inc.

Devon Energy

33

Legacy Reserves LP

60

Rex Energy Corp.

DLL

62

LINN ENERGY

1,57

Rice University

64

Lucas Energy Inc.

54,59

Duff & Phelps


Dune Energy Inc.
EIA

RigNet Inc.

59

16

Rimrock

13

Magnum Development LLC

58

RSP Permian Inc.

54

MAGNUM HUNTER RESOURCES

BC

Rystad Energy

14

55

Macquarie

32

ARCO

62

Enbridge

Asian Development Bank

44

Endeavour International

55

Marathon Oil Corp.

10

Sally Ride Science

64

Atlantic Offshore Rescue

60

Enduro Royalty Trust

55

Matador Resources

54

Sanchez Energy

54

Baker Botts

13

Energen

57

Mayer Brown LLP

55

SandRidge Energy Inc.

62

Energy Transfer Partners

30

MEO Australia Ltd.

61

Santa Fe Midstream LLC

13

25

Baker Hughes

32,62,64

30,64

59
55,60

BASF

64

ENERGYNET

Bayside Corp.

59

ENERTIA SOFTWARE

59

Bayside Petroleum Co.


BHP Billiton

14,61

Black River

Miller Energy Resources

54

Saxo Bank

Mobil E&P US Inc.

60

SCOTIABANK

EnLink Midstream

12

Moni Pulo Limited

39

SEC

Enterprise Products Partners

30

Morgan Stanley

EOG Resources

30

NASA

6
47
26,53

Seplat Petroleum

57

64

Shell

16

Blackeagle Energy Services

59

EPL Oil & Gas

55

Natural Gas Partners

58

Sidley Austin LLP

13

BLUEROCK ENERGY CAPITAL

45

Equitable Production Co.

62

New Development Bank

43

Silicon Valley Bank

59

EQUITY METRIX

29

Newfield Exploration Co.

34

Simmons & Company

58

European Investment Bank

44

NGL Energy Partners LP

Evercore Partners

12

NGP ENERGY CAPITAL MANAGEMENT

12

NiSource Inc.

13

Statoil

11,64

Noble Energy

64

TAILWATER CAPITAL LLC

49

BNP-Paribas

BOK FINANCIAL

37

BP

11,16,62

Bracewell & Giuliani

60

Explorer Pipeline Co.

Bureau of Labor Statistics

34

ExxonMobil

C & C Technologies

58

Freeport LNG

Cabot Oil & Gas

53,62

Gaffney, Cline & Associates

28

Technis Energy Ltd.

59

Goodrich Petroleum Corp.

58

Norton Rose Fulbright LLP

CB&I

64

GRAVES & CO.

61

CenterPoint Energy

64

GSO Capital Partners

57

Cheniere Energy

64

Haddington Ventures LLC

Chesapeake Energy

62

Halcon Resources

Chesapeake Midstream

13

6,28

North Dakota Industrial Commission

Tervita LLC

59

NYMEX

23,31

Torc Oil & Gas

57

58

Oceaneering International Inc.

58,62

Total

9,11

53

OHADA

40

TUDOR, PICKERING, HOLT & CO.

5,56

Hawk Sight Security Risk Management Ltd.

50

Oilfield Water Logistics

58

UK Export Finance

44

High View Energy LLC

60

OPEC

UK Oil & Gas Plc

62

HighMount Exploration & Production LLC

62

Opportune

24

Unit Corp.

54

Houlihan Lokey Capital Inc.

58

Pemex

11

US Department of Transportation

31

54

Phillips 66

12

US ENERGY DEVELOPMENT CORP.

15

US Geological Survey

32

Venture Global LNG Inc.

12

Victory Energy Corp.

59

Vinson & Elkins LLP

12

Hyperdynamics

31

IEA

28,61

Coastal Flow Measurement

62

IHS

Continental Resources

30

Inpex Corp.

11

Coronado Midstream Holdings LLC

12

International Project Finance Association

42

31

Plains All American Pipeline LP

13

10,34

Cowen and Company

31

IPAA

Crestwood Midstream Partners LP

12

Jackson Kelly PLLC

60

DCP Midstream Partners

10

JODCO

11

32,IBC

Deloitte

64

KeyBanc Capital Markets

60

Deloitte & Touche

27

Kinder Morgan Inc.

12

Kinetic Partners

King & Spalding

60

58

OIL & GAS FINANCIAL JOURNAL

6,10,28,62

Pipeline and Hazardous Materials


Safety Administration

PLS Inc.

1503ogfj_63 63

Norwegian Ministry of Petroleum and Energy 11

33

36,38

Teck Resources

58

Citgo

MARCH 2015

31

Tengizchevroil LLP

Cimarex Energy

Deloitte Transactions and Business


Analystics LLP

11,51,60

11

41

China Investment Corp.

9
54

61

CAPITAL ONE SOUTHCOAST

58

Southwestern Energy

Tap Oil Ltd.

Genscape

11,57,58,61

Sinopec

North Dakota Department of Mineral Resources

12

Chevron Phillips Chemical Company LLC

16

Canyon Midstream Partners LLC

Chevron

13,58

WWW.OGFJ.COM

56

Polaris Drilling Inc.

59

PWC

19

Quicksilver Resources Inc.

58

Rabobank International

62

RALPH E. DAVIS ASSOCIATES INC.

61

Viper Energy Partners

RANGE RESOURCES CORP.

IFC

RBN Energy

6,30

Williams

54
10,12

World Bank

44

WPX Energy

54

Ziff Energy Group

62

63

3/3/15 3:41 PM

BEYOND THE WELL

Sally Ride Science Festival hits Houston


SALLY RIDE SCIENCE, RICE UNIVERSITY, EXXONMOBIL,
OTHERS HELP CHAMPION STEM FIELDS
LONGTIME CHAMPIONS of science, technology,

MIKAILA ADAMS
SENIOR ASSOCIATE
EDITOR OGFJ

Middle school girls


participate in the Sally
Ride Science Festival
Sally Ride Science

64

1503ogfj_64 64

Parent workshops showcased the geology of


engineering and math (STEM) fields, Sally Ride SciHouston and Texas, presented information about
ence, Rice University, ExxonMobil and others have
raising a STEM-focused child, and discussed the
once again teamed up to promote STEM fields and
link between toys and engineering.
careers to middle-school students.
This festival presents a wonderful chance for
On October 25, 2014, over 1,000 girls, parents
students in Houstons middle schoolsespecially
and teachers gathered in Houston for a hands-on,
girlsto see the wide array of STEM fields and cafun-filled day of science and socializing at the Sally
reers open to them, said Sally Ride Science CEO
Ride Science Festival at
and co-founder Dr. Tam
Rice Universitypart of
OShaughnessy. STEM
a country-wide effort cocareers are often found
founded by the late Sally
in the fastest growing
Ride, the first American
segments of our econowoman in space, to inmy and can provide
spire a new generation of
some of the best ecofemale scientists and
nomic opportunities for
STEM leaders.
students. The hands-on
Women make up half
activities and role modthe nations workforce,
els that students will enbut reports show that
counter at the festival are
women hold less than
intended to help demon25% of STEM jobs. The
strate many exciting and
festival aims to increase
rewarding jobs that
that percentage by feamany students dont
turing a variety of STEMknow about.
oriented activities to
As part of the event,
help introduce female
each student who parstudents in grades 58,
ticipated took home a
and their parents, to
Sally Ride Science STEM
Former NASA Astronaut Wendy Lawrence
some of the nations fast- Photos by Sally Ride Science
careers book. The books
est-growing and highestprofile diverse women
paying careers through workshops, street fairs, exand men working in STEM fields and showcase the
periments, and keynote speakers.
wide array of careers available.
The sold-out October event featured
Sally Ride Science was cofounded in 2001 by Dr.
former NASA Astronaut Wendy LawSally Ride to help educators in grades 3-8 spark and
rence as keynote speaker and worksustain student interest in STEM topics and cashops for both students and parents.
reers. The companys pioneering professional deStudent workshops included chemical
velopment and engaging classroom tools build
engineering-focused topics such as Fun
connections between students academic work and
with Magnetic Fluids, and Creating Colthe exciting STEM fields that offer so many opporors with Chemical and Physical Interactunities in the 21st Century economy.
tion, lessons in geology and earth sciThe 2014 festival, the 14th annual event, was
ences with the Hydrocarbon Hunt and
made possible through presenting sponsors ExxThe Study of Fossils, a Robotics RoundonMobil and Rice University, with a generous conup featuring the field of computer scitribution from long-time event supporter Deloitte,
ence, as well as workshops focused on physics,
as well as through sponsorships from Baker
mathematics, biology, technology, astronomy, and
Hughes, Enbridge, CenterPoint Energy, BASF, Chemany more.
niere Energy, Strike, Noble Energy, and CB&I.
WWW.OGFJ.COM |

OIL & GAS FINANCIAL JOURNAL

MARCH 2015

3/3/15 3:41 PM

40,000+ ATTENDEES AT IPAA PROGRAMS!

2015 MEETINGS&EVENTS
Connecting the Upstream Oil & Gas Industry Across America
Since 1929, IPAA has provided opportunities for Americas upstream independent oil and gas
industry from across the country to examine current issues, strategize for the future and network with
the decision makers from E&P to service and supply companies.
Make plans to participate in these 2015 meetings and events.
For sponsorship and program information, contact Tina Hamlin at 202.857.4768 or thamlin@ipaa.org.

PCC

CONNECTING EXPLORATION AND


PRODUCTION COMPANIES WITH
FINANCIAL ADVISORS AND PROVIDERS.

IPAA EDUCATIONAL
FOUNDATION
FUNDRAISERS

PRIVATE CAPITAL CONFERENCE


JAN. 29, 2015
JW Marriott Houston
Houston, TX

DCATTER
WSIPLORTING CLAYSS

CONNECTING ENERGY SUPPORTERS FROM ACROSS THE


COUNTRY AT NETWORKING AND FUNDRAISING EVENTS
THAT BENEFIT WORTHWHILE INDUSTRY CAUSES.

WILDCATTERS
SPORTING CLAYS

WILDCATTERS BALL

OCT. 23, 2015

Hilton Americas
Houston, TX

FEB. 13, 2015

Dallas Gun Club


Lewisville, TX

The IPAA Educational Foundation is a 501(c)(3) organization.

NAPE

CONNECTING PURCHASERS, SELLERS AND TRADERS OF OIL AND


GAS PROSPECTS AND PROPERTIES. IPAA IS A PROUD PARTNER OF
THE WORLDS LARGEST E&P EXPO!

WILDCATTERS
OPEN

CONNECTING INDUSTRY
PROFESSIONALS FOR A CASUAL
AND FUN NETWORKING EVENT.

NAPE Summit

NAPE

WILDCATTERS OPEN

FEB. 10-13, 2015

DEC. 9-11, 2015

MARCH 26, 2015

Houston, TX

Denver, CO

Blackhorse Golf Club


Cypress, TX

NAPE
AUG. 19-20, 2015
Houston, TX

OGIS

CONNECTING PUBLIC OIL AND GAS COMPANIES WITH THE INVESTMENT COMMUNITY AS THEY PRESENT
THEIR STRATEGIC CORPORATE PORTFOLIOS.

OGIS FLORIDA

OGIS NEW YORK

OGIS TORONTO

OGIS SAN FRANCISCO

FEB. 3, 2015

APRIL 20-22, 2015

JUNE 4, 2015

OCT. 5-7, 2015

The Ritz-Carlton
Fort Lauderdale, FL

Sheraton New York


Times Square Hotel

The Ritz-Carlton
Toronto, ON

The Palace Hotel


San Francisco, CA

CONGRESSIONAL
CALL-UP

CONNECTING INDUSTRY LEADERS WITH


LEGISLATIVE AND REGULATORY DECISION
MAKERS IN WASH., DC TO EDUCATE,
INFORM AND BUILD RELATIONSHIPS.

CONGRESSIONAL
CALL-UP
MARCH 2-4, 2015

MEMBERSHIP
MEETINGS

ANNUAL&
MIDYEAR
MEETINGS

Washington, DC

I N D E P E N D E N T P E T R O L E U M A S S O C I AT I O N O F A M E R I C A

1503ogfj_C3 3

CONNECTING EXECUTIVES FROM ACROSS THE


COUNTRY TO NETWORK AND LEARN THE LATEST
NEWS OUT OF WASHINGTON AND ISSUES THAT
COULD IMPACT BOTTOM LINES.

MIDYEAR

ANNUAL

JUNE 24-26, 2015

NOV. 8-10, 2015

Eldorado Hotel & Spa


Santa Fe, NM

The Ritz-Carlton
New Orleans, LA

W W W. I PA A . O R G / M E E T I N G S - E V E N T S

3/3/15 3:41 PM

MAGNUM HUNTER RESOURCES CORPORATION


NYSE: MHR
NYSE MKT: MHR-PrC, MHR-PrD, and MHR-PrE

LEAVING THE HERD...


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Contact: Cham King


(832) 203-4560
www.magnumhunterresources.com

3/3/15 3:41 PM