As oil and gas prices stabilise somewhat after several years of increased volatility, greater investment upstream will likely trickle down to infrastructure, according to Texas-based Haynes and Boone.
In a recent survey, the law firm found that most industry participants, including oil producers, services companies and private equity houses, expect exploration and capital expenditure budgets to increase in 2017 compared to 2016. Nearly two-thirds of respondents anticipated those increases to be substantial (at least 20 percent).
This uplift was bound to benefit the midstream sector as well, Kraig Grahmann, a partner at Haynes and Boone, told Infrastructure Investor. “We’re going to see a significant increase in drilling that we haven’t seen over the last couple of years. This is going to build the need for more infrastructure to get that production from new wells to the market.”
This trend, he noted, was underpinned by the sustained oil price recovery, which notwithstanding residual volatility was being supported by OPEC commitments to reduce production. Compliance with such output cuts had been better than expected, he argued. The Brent benchmark traded at $30 a barrel at its bottom in 2016, a multi-decade low; it closed at more than $50 last Friday.
The difficult circumstances of the last couple of years had also led US producers to adapt to a “new normal”, where they have now figured out “how to drill and produce and achieve their desire rate of return in the low-price environment”, Grahmann observed.
The mini-investment boom, he said, would be embraced by lenders. “A lot of commercial banks that were hit with bad loans when prices fell don’t have that much of an appetite to go all in on upstream oil and gas loans. But they do have appetite for midstream. It’s not a space where they got into a lot of trouble, they see it as more stable.”
On the equity side, he reckoned private capital could play a significant role – though he admitted that competition for assets, in some parts of the market, was already strong. “A lot of the private equity hot players right now are looking at the Permian Basin. Those acquisitions have become so expensive. The only way to finance them and get the desired rate of return is via a public equity offering.”
Much of this appetite was reliant on the continued stability of oil prices, he cautioned. “There’s more optimism but there’s still some softness to all this. It remains subject to OPEC’s willingness to play its role in propping up the market.”