LNG Exports. Natural gas prices in the
U.K. and Japan are $8.85 and $16 per
million Btu (MMBtu), respectively.
this significant premium to natural
gas prices in North America, several
companies are planning to construct
liquefied natural gas (LNG) export
terminals. Projects that are currently
planned are expected to use about 10
Bcf per day.
6 However, the first of these
LNG export terminals, Cheniere Energy
Partners in Sabine Pass, Louisiana, is
not planned to come online until 2015.
oil) feedstock to methanol-based
feedstock and an increased use of
methanol as an energy source.
of Capex Budgets
Directed Toward Dry Gas
While there is a compelling case for
increasing demand of natural gas due
to the extreme divergence with the
price of oil, these structural changes to
demand will take some time to occur.
Further, it is important to note that
if the oil-to-gas price ratio narrows
due to falling oil prices, then the case
for natural gas would become less
compelling. This is a key risk in the
future of natural gas. Therefore, natural
gas-heavy E&P companies need to
take measures to ride out a potentially
prolonged low-price environment.
Encana Corp. (ECA)
Vehicle Fuel. Because natural gas is a
cheaper and cleaner burning fuel than
gasoline and diesel and is domestically
abundant, an effort is underway to offer
compressed natural gas (CNG) and
LNG as viable vehicle fuel alternatives.
The most likely early adopters of this
fuel are vehicle fleet operators that
conduct refueling in concentrated
areas or along well-defined routes,
such as trucking companies, taxis, and
municipalities. Some large companies
already have announced the beginning
of fleet conversions, including AT&T,
Frito Lay, and Waste Management.
Further, the construction of a nationwide
refueling infrastructure has already
begun, with Clean Energy Fuels
announcing that it will build 150 LNG
truck fueling stations across the U.S.
in 2012 and 2013. Once complete, this
network of stations will allow natural
gas-powered freight trucking to occur
anywhere in the U.S. Concurrently, major
truck and truck engine manufactures
are developing natural gas-powered
models that are expected to reach
market later this year or in 2013.
As mentioned, the timing of a recovery
in natural gas prices is uncertain,
and many E&P companies’ balance
sheets may not currently have enough
flexibility to manage through the low-price environment without facing a
significant risk of financial distress.
Management and boards of directors
are not blind to this issue, and many
are taking preemptive actions to insure
that their companies can survive and
that valuable assets are preserved for
the ultimate benefit of shareholders
once natural gas prices strengthen.
Sale of Non-Core Assets. E&P
companies have acquired vast asset
holdings in recent years in the race
to acquire the best acreage and
subsequently develop midstream assets
to serve their drilling and production
operations. Since many of these assets
are non-core or are more valuable
to someone else, companies are
electing to sell these assets to raise
capital. Recent examples include:
and hopes to receive $500 million
to $700 million in proceeds.
Alternative Financing. In addition to
raising traditional balance sheet debt
and equity capital, E&P companies are
also employing other means of raising
capital, such as joint ventures, royalty
trusts, and volumetric production
payments (VPPs). Joint ventures and
royalty trusts are similar to raising equity,
but are limited to discreet assets, and
companies employ these structures
to appeal to specific investor types.
Methanol. Methanol, which is made
primarily from natural gas and coal,
is heavily used in the petrochemical
industry, as well as in the energy
sector as a gasoline blendstock. The
petrochemical industry, the largest
consumer of methanol, uses it to
make formaldehyde, acetic acid, and
other chemicals that have a wide
range of end-product applications,
such as plywood, paints, adhesives,
silicones, and plastic bottles.
a target of $11.5 billion to $14
billion of asset monetizations
in 2012, including its Permian
Basin acreage and certain oilfield
services and midstream assets.
a Form S- 1 for an initial public
offering of Quicksilver Production
Partners, a master limited
partnership containing certain
Barnett Shale assets. Quicksilver
hopes to garner $400 million in
proceeds from the transaction.
its intention to sell TGGT
Holdings, LLC, its midstream
gathering and transportation
assets in the Haynesville Shale
Joint ventures appeal to investors that
would like to make direct investments
in oil and gas production but in many
cases lack the technical “know how”
and sometimes to foreign investors
wanting to gain knowledge or access
to a low-cost natural gas supply.
Chesapeake Energy has used this
structure extensively, but others have
as well, including Encana Corporation
in its recent $2.9 billion sale of a 40
percent interest in certain British
Columbia gas assets to Mitsubishi.
Royalty trusts appeal to yield-oriented
investors, but have not been used as
extensively as joint ventures. However,
recent royalty trust transactions
include the SandRidge Energy
Mississippian I & II and Permian trusts.
Given natural gas’s cost advantage
over crude oil, the methanol industry
is expected to grow at about 10. 8
percent per year from 2011 to
7 driven primarily from the
petrochemical industry switching
away from naptha-based (i.e., crude
VPPs are debt-like instruments tied
to specific assets and are considered
debt instruments by the ratings
agencies. Understanding a company’s
VPP obligations is very important to
understanding its true debt position.