CERAWeek 2015: Financing gas and LNG through the cycle

Roger Diwan, IHS Vice President, Financial Services, chaired the Wednesday strategy session "Financing Gas, LNG, and Midstream Through the Cycle." The panel agreed that widely available equity has alleviated the impact of lower oil and natural gas prices in North American markets and has resulted in fewer financial transactions (such as mergers, acquisitions, and partnerships) than might otherwise have occurred given the price drop. However, this abundance of available equity funds seeking investment opportunities has also resulted in some transactions that might otherwise not have taken place in a tighter equity market.

The panel agreed that the sharp drop in oil and natural gas prices has fundamentally shifted the way in which financial investors evaluate some opportunities. In the oil and gas upstream sectors investors are focusing increasingly on the potential for an oil or gas play to deliver productivity gains, based on an assumption that oil and gas prices will remain low over at least the next four to five years. For large-scale liquefied natural gas (LNG) projects, credit-quality, long-term commitments from gas buyers will be critical in securing financing. And in the midstream sector, infrastructure companies are shifting away from fee-based contracts and toward volumetric-based contracts to guarantee stable cash flows over the longer term.

Mr. Diwan said that the recent drop in oil prices is not likely to have a significant effect on North American natural gas production or signal a major shortfall in supply later this decade as power sector gas demand and LNG and pipeline exports increase. "We remain fairly bearish (on prices), because there is a lot of gas that will be able to meet that demand," he said. Mr. Diwan stated that the oil price impact on associated gas production "is not very large. We have plenty of gas to replace some losses on the associated side, so we don't believe it's a big part of the equation."

David Foley, Principal Managing Director at Blackstone Energy Partners, said, "The upstream separation of acreage by quality will become more draconian. The focus no longer is on where is the good acreage." Instead, he said, investors want to see full development of the acreage and determine whether this provides them with a reasonable rate of return. The potential for further upstream productivity gains (such as reduced drilling days) is now a critical factor in the evaluation process.

Robert M. Tichio, Partner at Riverstone Holdings LLC, said that investors will be looking for upstream natural gas assets to show a strong inventory of potential production to enable potential investors to model a rate of return. As a result, gas asset transactions in North America in the near term will be "highly price sensitive and asset specific." Mr. Tichio said that investors should ensure that they do sufficient work to assess the break-even costs of the assets they are financing. "A lot of deals are getting priced at very attractive rates relative to where they should be priced in any normal market," he said. "Less defensible partnerships will either struggle or face challenges with respect to their business models."

Roberto Simon, Managing Director and Head, Project and Energy Finance Americas, Societe Generale, said that LNG contracts have shifted away from point-to-point (location-specific) contracts and from oil- to gas-indexed contracting. Mr. Simon stated that the contractual form of offtake agreements underpinning large-scale LNG projects "will continue to evolve driven very much by demand." He added that this will result in "a whole variety of contracts."Investors want visibility on cash flow and credit quality. Shorter-term contracts (e.g., 10-year terms) may become more prevalent, particularly for expansions to existing projects.

Michael Casey, Managing Director, Energy, at Citigroup Inc., said that investors in the midstream sector are adjusting to the lower price environment by seeking assets that are supported by volumetric-based agreements (e.g., minimum throughput levels), rather than fee-based agreements. He said that this effectively transfers risk back to the producer.

Rabee Sahyoun, Head of Natural Resources, Corporate Finance at ING Bank, stated that European banks' investments in the European gas sector traditionally have been based on long-term views, and that short-term oil or gas price changes will not significantly affect this perspective. He noted that it may be difficult for other sectors, such as power, to attract this type of investment, however, unless they are able to provide long-term stable cash flows.

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By Anusha de Silva April 22, 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.