PwC explains impacts of Q3 shale deal values

By Staff | November 13, 2018

In the third quarter, shale deal values increased by 73 percent compared to the previous quarter. The  $122.8 billion recorded for Q3 2018 marks the second highest deal value total since the third quarter of 2014, according to the team at PricewaterhouseCoopers.

We spoke with the energy experts team at PwC to learn more about their Q3 examination of shale oil and gas and the deals that could define current and future trends.

To start, the report mentions that some of the deals that took place recently were done so to collapse an MLP structure. Can you explain why that is?     

A number of factors currently are impacting MLPs, including simplification, cash flow and regulations. Investors are rewarding midstream companies with simpler structures. Thus, removing complicated ownership structures is viewed as investor friendly. Dropping incentive distribution rights and the associated significant cash flows being paid to sponsors leaves more capital for the MLP, making the MLPs more attractive to investors. On the regulatory front, the recent FERC ruling on disallowing cost of equity in rate case adversely impacted MLPs, and tax reform has investors reconsidering the marginal benefit of an MLP structure vs a C-corp.   MLPs are still a viable and valuable structure in the sector, and these recent changes are part of the normal evolution of an asset class that has a long life ahead.

What is the major upside for investors getting into or staying in shale right now? 

The upside is the prolific production operators are seeing in their shale assets. Tightening supply and demand dynamics could push oil north of the current trading ranges resulting in meaningful free cash flow upside.  New pipeline construction projects expected to come on line starting in 2019, will ease capacity constraints in the Permian and allow for increased production and cash flow for Permian investors.

The report has oil in the $60-$70 range. If oil trades higher, what would it mean for deal activity? 

We would expect higher deal activity as higher oil prices push up deal values into the range of values that sellers are requesting and buyers will be willing to pay.    However, there needs to be a balanced perspective on oil higher prices, as at some point higher oil prices will negatively impact economic growth and deal making.

What factors could shift energy companies away from their capital discipline mantra (spending within free cash flow) that many are using to guide their spending right now?  

If capital markets enthusiastically embraced the sector with cheap capital, companies may abandon their focus on capital discipline and their focus on living within their free cash flow. 

Does the current “state of shale/unconventional energy development” compare to any previous times, or is this period unique? If possible, please explain. 

The shale revolution is a unique time period in energy history. Its hard to think of a recent period where the US production was as cost advantaged in the global marketplace as it is today.  The technology and the capital that came together to make drilling in the shale possible, and then to improve productivity and the cost profile are unprecedented, and stand as a tribute to the ingenuity and inventiveness of those working in the energy sector.

Given the constant change in the oil and gas space, how is the PwC team able to continually meet the demands of its oil and gas clients? 

At PwC, we work closely with our clients and we listen to the challenges they face as they run their businesses. This client input and other insights we gain from operating in that same environment allows us to proactively manage the solutions we bring to help clients, it drives our hiring decisions, and it helps to design our internal training curriculum.  If you are going to be successful in the energy sector, you need to be as nimble and as dynamic as the sector itself – at PwC we strive for that every day.