Attracting more than 100 attendees from all over the country, King & Spaldings second Energy Forum for 2017 held at The Houstonian Hotel in Houston, addressed energy capital markets from the perspective of both private equity and public offerings. Industry leaders in the corporate, legal and banking arenas discussed trends they are seeing in energy capital markets and the challenges that the industry faces in light of an uncertain regulatory environment and continuing low oil prices. Industry experts, including some of the panelists at the event, generally predict that the sector is rebounding from the record low oil prices in 2015 and 2016 and that the capital markets are healthy.
At the forum, Tom Spulak, Partner at King & Spalding, spoke about President Trumps first 100 days in office and what to expect from his administration. Additionally, panels of experts discussed emerging issues and trends in private and public equity fundraising in the energy sector.
Below are select highlights from the event.
One Hundred Days and CountingWhat to Expect in the Trump Administration
Tom Spulak, a Partner in King & Spaldings Government Advocacy and Public Policy group, served as the forums keynote speaker. He looked back on President Trumps first 100 days in office and provided some insights into what the industry may expect from President Trumps administration going forward.
Mr. Spulak noted that President Trump campaigned on a platform of de-regulation, but the path forward has proven to be more difficult than the President anticipated. Two arenas in which President Trump has seemed to focus his efforts to de-regulate are energy and environment (e.g., the Keystone XL pipeline and the Dakota Access Pipeline).
Mr. Spulak stated that he believes Dodd-Frank reform is coming, but that change will be slow and gradual.
Tax reform was another key issue of the Presidents platform during the campaign. Mr. Spulak believes that reform is coming in the next two years, but that, due to the nature of politics in Washington in 2017, it will look very different than the tax reform passed in 1986, which was a much more bi-partisan effort.
What is next, depends on the popularity of the President. With Congressional seats up for grabs and the Democrats attempting to take back a majority, you may see some Republicans begin to distance themselves from the President should his popularity with the public wane.
Private Equity Fundraising in the Energy and Infrastructure Space
Moderated by Kathryn Furman, a Partner in King & Spaldings Capital Transactions & Real Estate group, the panel covered the market for private equity fundraising in the energy and infrastructure industries. Panelists included Laura Tyson, Managing Director, General Counsel and Chief Compliance Officer of The Energy & Minerals Group; Richard J. Kradjel, Managing Director of Societe Generales Corporate and Investment Banking division and; Chris Halloran, Vice President of Prudential Capital Group.
One of the trends that has emerged over the past year, is a movement to allocate a portion of a funds capital to earlier stage investingin many cases pre-final investment decision (FID), also known as development stage capitalin order to provide the opportunity to generate higher returns (albeit with more risk).
Social responsibility is another hot button item in private equity fundraising. While returns are still the most important factor, general partners are focusing more on the environmental, social and governance (ESG) aspects of their investments, on the insistence of their investors.
A third trend discussed by the panelists is the increased occurrence of investors, particularly institutions, investing directly in portfolio companies, rather than in a fund. The panelists remarked that this phenomenon was being led by several large Canadian pension funds. Many portfolio companies welcome direct investment by institutions because they are seen as having a lower hurdle rate, and therefore providing a lower cost of capital, than private equity funds.
The panelists noted that renewable energy (especially wind and solar power) is becoming more and more competitive in the market as costs continue to come down. There are still not many big plays in the renewable space, but it is being monitored going forward.
Overall, the panelists agreed that 2017 should be a good year for private equity fundraising in the energy and infrastructure sectors and that the more difficult task will be identifying projects to generate the required returns.
Energy IPOs and other Capital Market Trends
Led by Jeff Malonson, Partner in King & Spaldings Corporate Group, this panel discussed the market for initial public offerings of energy companies and other trends in the public capital markets. Panelists included Scott Warrender, Managing Director of Wells Fargo Securities Oilfield Services division; Randy Bayless, Managing Director of Credit Suisses Upstream Oil & Gas division and; W. Nelson Mabry, Managing Director of Barclays Midstream Oil & Gas Division.
The panelists discussed the decrease in the number of energy IPOs, from 44 in 2014 (when oil topped $100 a barrel) to just 13 in 2016. Initially, 2017 appeared to be on an upswing, bolstered by gradually rising oil prices. The brief rally was short lived as oil prices began a steady decline in March, sidelining and delaying a number of planned IPOs in the energy sector.
The panelists briefly discussed OPECs apparent inability to impact oil prices by controlling output by its member nations. In this regard, a panelist noted that increased production by U.S. producers is causing supply to remain flat and storage levels have not decreased materially.
All panelists agreed that it was too early to tell the impact the Trump administrations policies may have on the industry, but that generally, de-regulation should have a positive impact on the energy sector as more infrastructure projects are likely to be permitted.
The panelists discussed the flurry of activity in the Permian Basin, which they all agreed remains the most attractive basin in which to operate in the countryand therefore drawing the most interest from investors because of the basins stack formation and relatively low development costs.
The panel moved from the Permian to a discussion of which basins may be the next major plays after the Permian. The Eagle Ford Shale, the DJ Basin, the SCOOP/STACK Play, and perhaps, even the Bakken/Williston Basin, the Power River Basin, and Three Forks area were all mentioned as potential plays. While the industry is searching for the next basin, the panel remarked about the relative unimportance to most investors of geographic diversificationmost prefer companies that operate in a single basin.
The panel also discussed the recent trend of special purpose acquisition companies (SPACs) in the upstream IPO arena. The panel stated that the flexibility of capital allows SPACs to do large deals. Although the use ofSPACs could begin to extend to midstream assets, a panelist noted that it was unlikely to be deployed as a financing vehicle in the oilfield services sector.
Finally, the panel discussed IPOs of mineral and royalty interest companies. The panel noted that these companies have a number of inherent benefits, principally, the mineral and royalty interests are a non-cost-bearing interest in the minerals. Given the benefits of the interests, the panelists believe that more mineral and royalty interest companies will IPO this year.