NAPE on track for another 12,000 attendees

At the oil and gas industry’s annual mega-get together, the NAPE Expo in Houston, some of the energy sector’s most thoughtful leaders gave their views on where things stand in the oil and gas upstream sector in 2019.

NAPE stands for North American Prospect Expo. The group celebrated its 26th birthday this year. NAPE was founded by AAPL and added partners IPAA, SEG and AAPG as a place for the upstream to annually meet up to do business.

Mike Grimm tells it like it is

Shale Companies Learned Some Lessons in 2018, U.S. Hydrocarbon Output a Global Force in 2019: NAPE Founder - Oil & Gas 360

Michael K. Grimm gave the luncheon keynote address at NAPE 2019.

One of NAPE’s original individual founders gave the luncheon keynote talk on Wednesday at the Global Business Conference portion of NAPE. Mike Grimm is a director of Anadarko Petroleum (stock ticker: APC, $APC) and Energy Transfer Partners (stock ticker: ET, $ET). He co-founded RSP Permian (acquired by Concho Resources in 2018) and served as its chairman and co-CEO. Grimm serves as president of Rising Star Energy Development Company and Rising Star Petroleum.

Growth gives way to cash flow

Grimm gave a terrific roundup of the state of the U.S. oil and gas industry, looking at the key themes that developed in 2018 and what’s coming next.

Grimm said in his view the most significant event in 2018 was the change of the upstream business model from a focus on growth to living within cash flow. He said the shale operators focused on their tier one areas and unloaded the tier two assets to generate cash for dividends, buybacks and debt reduction.

M&A in shale

Grimm ran down the list of the biggest upstream transactions in 2018. They add up to more than $80 billion in deal value:

  • BP (stock ticker: BP, $BP) acquired BHP’s (stock ticker: BBL, $BHP) oil and gas assets
  • Concho Resources (stock ticker: CXO, $CXO) acquired RSP Permian
  • Diamondback Energy (stock ticker: FANG, $FANG) acquired Energen and then Ajax Resources
  • Denbury Resources (stock ticker: DNR, $DNR) announced its acquisition of Penn Virginia (stock ticker: PVAC, $PVAC)
  • Chesapeake Energy (stock ticker: CHK, $CHK) acquired WildHorse Resource Development
  • Encana (stock ticker: ECA, $ECA) acquired Newfield Exploration (stock ticker: NFX, $NFX),
  • Cimarex Energy’s (stock ticker: XEC, $XEC) announced acquisition of Resolute Energy (stock ticker: REN, $REN).

Grimm pointed out that the investment community had called for consolidation, but then showed its strong dislike of the bigger deals, delivering 10 to 20 percent blows in share prices after deals were announced.

Grimm said that in transactions outside the public company arena, the large private equity backed companies bought the smaller ones and the operators bought out the non-ops in the shale space.

As far as deals in the works, Grimm mentioned Elliott Management’s takeover bid for QEP, asking, “Will it close?” He also referenced rumors of Shell being in talks with Endeavor, which he described as “probably about a $30-billion deal.”

Supply and demand going forward

Grimm said that we’ll see U.S. supply growth if oil stays above $50 per barrel. He said the shortfall of conventional oil development will be felt. “Non-OPEC production will have to be replaced by shale.”

As far as demand for oil, he pointed to the fact that the Chinese consumer’s preference has been shifting from cars to SUVs, and India is in the middle of a shift from motorcycles to cars. Both point to growing future demand for petroleum from the world’s two most populous nations.

On the supply side Grimm said “the Non-OPEC countries disappoint.” He said the developments that make up this group include:

  • Brazil’s technical issues with Campos and Lula,
  • Lack of growth in the North Sea,
  • Mexico’s delay in turning around its production,
  • Canada–Alberta’s government-mandated removal of barrels off the market,
  • Russia’s output cut of 200,000 barrels combined with their years of 1% annual production growth holding steady while Rosneft’s CapEx has doubled–pointing to field production declines,
  • IMO 2020, the mandate that shippers can’t use any oil with high sulphur content, will remove 1.0 million to 1.5 million BOPD from the market,
  • Gawar on the decline–Saudi is operating at its highest rig count, drilling horizontal wells in the crestal part of the field, and has to use seawater in its operations. “Their cost of production is going up; we are now competitive with shale, with oil above $50,” Grimm said. He said that Saudi Arabia thrives on power, often derived from not producing, but that the era of Saudi simply turn the spigot on and off is over. They need the revenue to fund “their cradle to grave welfare model”; Grimm pointed out there has been no significant discovery in Saudi Arabia since 1968.

Looking at the U.S. and the likelihood of U.S. oil and gas to continue its growing global supplier role, Grimm pointed to:

  • Growth of the success of cube development in the Permian;
  • “The industry will continue to drill longer laterals and target better zone completions”;
  • The increased demand for light crude from requirements of IMO 2020;
  • The vast amount of recoverable remaining oil in place in the Permian–Grimm calculated that if the Delaware and Midland basins have 9,000,000 core acres, or 14,000 sections and 25% is not going to be developed because of surface restrictions and other reasons, that leaves 75% with 150 million barrels of oil per section or 1.5 trillion BOE of original oil in place; 10% recovery would mean 150 billion barrels of oil that are recoverable: “the industry will need to drill 220,000 horizontal wells to recover that oil”;
  • 5 Bcf/day growth from LNG exports and Mexico;
  • The U.S. probably has the cheapest oil in the world;
  • The oil majors won’t slow down–they are growing their shale operations;
  • The U.S. oil and gas industry has increased recovery efficiency almost two to one in the past two years.

Powder River Basin’s Turner formation is ‘the new play for 2019’ and rest of world is ‘coming to America’

Looking to what’s likely to be on the docket for this year in the U.S., Grimm said the new play for 2019 will be the Powder River Basin with a heavy emphasis on the Turner formation.

Grimm said the shale producers “are doomed unless they can make it work on net cash flow. If they make 10 percent, five percent goes to company coffers, five percent goes back to investors as dividends or buybacks.”

If a company pays more than a 10%-15% premium for an acquired producing company, it will be penalized in the markets, he said.

The rest of the world is “coming to America,” Grimm said, referencing the Qatar Petroleum-Exxon Golden Pass FID, Southeast Asia committing billions of dollars to LNG export facilities in the U.S. and the Saudi investments in U.S. energy projects.

“The majority of global growth rests in the hands of U.S. producers,” Grimm concluded. “And don’t underestimate American ingenuity and perseverance.”


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