Oil and Gas

Sidley Austin's Irvin discusses investment, transaction trends amid down market

How are oil and gas companies adjusting their business activities to manage current market dynamics? During today's OnPoint, Kenneth Irvin, co-leader of Sidley Austin's global energy practice, discusses emerging trends for investments and financial transactions and efforts to transform old business models to adjust to today's market. Irvin also weighs the potential for market manipulation investigations.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Ken Irvin, co-leader of Sidley Austin's global energy practice. Ken, it's great to have you here back on the show.

Kenneth Irvin: Monica, thank you. It's great to be back.

Monica Trauzzi: Ken, energy companies are adjusting their business activities to account for the dramatic changes in the oil and gas markets. On the production side, what is the pattern that's emerging for investments and financial transactions to manage through this difficult time?

Kenneth Irvin: Well we're definitely in a prevailing low-price environment, and it's creating problems for producers and the people who transact with them. For example, we have a lot of pipeline clients who are facing shippers who may be on the verge of bankruptcy, may no longer be generating the revenue that they were accustomed to, maybe are not quite as credit secure as they used to be. So those are the types of issues that we're seeing people deal with right now in today's market.

Monica Trauzzi: And so then what's the solution to that? What are those sort of transactions and investments?

Kenneth Irvin: Well people are looking at creative ways to do longer-term commodity transactions, a way to get the producer some capital now, trying to find assets that you could monetize, take advantage of perhaps some portion of a producer's total array of assets is in the money, can make some use of that for raising capital now. A lot of our clients are hedge providers, so they look at offering transactions that will give a producer cash now, capital now to satisfy credit worthiness requirements in exchange for a longer-term commitment to buy natural gas or oil at a price that's attractive in today's market.

Monica Trauzzi: How much of an appetite is there to transform old business models, or is there really no choice but to do that?

Kenneth Irvin: You know there's a need in the marketplace for these types of transactions. There's a lot of risk because there's a fair degree of uncertainty about what the future of demand for natural gas, for crude looks like, but we're still producing it, there's a need for it, and I think people are interested in finding ways to do these transactions. The threat of bankruptcy looms and perhaps we'll get to a point where so many have filed for bankruptcy, those who haven't are at a competitive disadvantage, but right now people are looking for ways to deal with it. There are folks who are willing to take on these risks for the right kind of compensation.

Monica Trauzzi: So on bankruptcy is your expectation that we will see more and more companies filing?

Kenneth Irvin: You know if the low-price environment persists since September in natural gas for example we've seen the price go from roughly $3 an MMBtu to today's market is just a little north of $2, so that's a pretty dramatic change. Folks who structure their balance sheet around $3, $4 gas in a $2 market are going to have to restructure. That's inevitable, and as more and more producers file for bankruptcy that puts pressure on those who haven't yet filed. So we expect to see a lot more bankruptcies.

Monica Trauzzi: It's a good time on the flip side for natural gas consumers. Where are the biggest opportunities for long-term purchases?

Kenneth Irvin: If you're a buyer, if you're a load-serving entity and you need gas to run your power plants or for space heating, this could be an attractive market for you. I've talked about Mexico and the opportunities with the restructuring down there with the electric utility.

Mexico's changes now allow the electric utility to buy the fuel it needs for its own power plants and they're in the market looking to make acquisitions for the long term of natural gas. Terrific opportunity for them to lock in low prices. Here in the United States we see several states through their public utility commissions encouraging utilities to look also to long-term production investments as part of a portfolio approach to fuel supply needs.

Monica Trauzzi: And big opportunities also for the overseas market in terms of LNG exports?

Kenneth Irvin: Most definitely anybody in the United States is looking for markets where you maybe find a little more attractive prices, there's a big rush on to take gas overseas. That market is in a bit of flux because Asian markets the price spread has come in a bit and it maybe has lost some of its attractiveness, but finding markets that we can do better on the purchase price than here in the United States is definitely a keen interest for several folks.

Monica Trauzzi: When do you think we could reach a point of equilibrium?

Kenneth Irvin: That's hard to say. There's a lot of change happening right now. In 2015 industrial demand for electricity was down even though the economy maybe grew some bit through efficiency, through other techniques. It looks like demand for electricity isn't growing at the same pace overall it used to, and making electricity is the biggest use of natural gas, so there's a fair bit of transition.

When you look at the pricing curves things are pretty flat, so we don't see a lot of upside over the near term. At some point we will find an equilibrium, but there's a lot of policy changes here in Washington that'll affect the market. There's a lot of economic issues that are going to continue to affect the market.

Monica Trauzzi: Let's talk about enforcement. Obviously whenever there's a scenario as dramatic as the one that's playing out right now in oil and gas markets, there's a potential for market manipulation. FERC will watch this closely. What is the landscape on investigations as you see it?

Kenneth Irvin: We are aware that FERC is investigating the gas market now and worried about that. FERC doesn't investigate the oil markets, but the CFTC and the Federal Trade Commission will. The observation is that in times of stress like what we have here people who are underperforming their management's expectations will get seduced into doing things they shouldn't be doing.

FERC is aware of that and they're paying attention to it for instance in the gas market. I think there will be a continued focus on enforcement. I think FERC would want to make sure that people aren't taking advantage of a loss of liquidity, a loss of overall market participation that can sometimes help neuter the opportunity to commit manipulation, and the commission is acting strongly and taking advantage of its new powers.

Monica Trauzzi: So what are some other major litigation trends that you're preparing your clients for?

Kenneth Irvin: You know I think intervening regulatory change is a tough thing. It's something that we deal with in a long-term supply agreement, who's going to bear the risk of what market changes might come, what policy changes might come. It's a difficult thing to contract. Sometimes the best we can hope for is an agreement to agree. Other times people are willing to take those kinds of risks. Hopefully none of that actually ends up in litigation, but those are some concerns we have.

Monica Trauzzi: All right, Ken. Great to have you on as always. Thanks for coming on the show.

Kenneth Irvin: Thank you very much.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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