Following the dramatic decline of oil prices, integrated oil and gas companies are increasingly looking at divestitures of their midstream assets to raise money.
In recent weeks, Southwestern Energy Co. has raised more than $700 million in two transactions to sell off its gathering assets in the Marcellus and other basins. Both Pioneer Natural Resources Co. and Oasis Petroleum Co. are reportedly negotiating deals for their midstream assets; and Energy XXI is looking to monetize its facilities business.
Raymond James analyst Andrew Coleman said there are three primary ways companies can raise capital when commodity prices fall: through a debt window, an equity window or an asset market window.
“With commodity prices falling so quickly, the A&D market has virtually ground to a halt. With the huge amount of debt issuance over the last couple of years and the subsequent fall in commodity prices driving up everyone’s leverage ratios, there is very little new debt being taken out,” he said. “Investor sentiment is very negative on the space. If those three primary ways of growing capital in the space are not available or are challenged, then you start to look at other ways to raise money. Selling non-core assets is one of those.”
All of which could lead to a shift in the energy landscape where pure-play companies are more common. Coleman noted that one reason E&P companies ventured into the midstream space was the result of prolific shale plays.
“When the market was very robust, it was hard to get people to do your work. So if you couldn’t get frack sand, we’ve seen companies go out there and buy sand mines. If you couldn’t get pipe built to your asset, we’ve seen people add midstream businesses or pipeline businesses,” he said. “I think it’s just the market and E&Ps trying to find a way to adapt to whatever the external market looks like and in this environment—given the higher leverage on most balance sheets— because of low commodity prices, they began to find ways to raise capital and shed non-core assets.”
Selling off those assets permits a company to more efficiently focus its capital on its chief business line. In the current environment, most companies appear poised to sell assets, rather than attempt a drop-down re-structuring.
“A ‘sum of its parts’ valuation is usually what you get when you talk about a dropdown story, but sometimes it’s more difficult to make a clear distinction on what the value is,” Coleman said. “When they’re outright sold or spun out, then it’s a little more transparent because the two assets are unrelated at that point.”
—Deon Daugherty, Associate Editor, Midstream Business. Contact Deon at firstname.lastname@example.org.
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