APPEX Global Coincides with High Investment Opportunity

If the recent evidence of an uptick in acquisitions and divestiture activities continues, the next APPEX Global event in London should coincide with many new international prospects in the first quarter of 2018. But if this proves to be correct, the A&D bargain-bin environment won’t last much longer, said the event’s chair, Mike Lakin of ENVOI Limited in London.

At some point, he said, the effect of the industry’s recent downturn will rub away, as has always happened historically when E&P companies return to the market after the slow-down and seek new deals to replace and rebuild their prospective upstream portfolios.

“When the oil price will come back sufficiently for this to happen is anyone’s guess, although I believe it will be sooner than most of the so-called experts are now predicting,” Lakin said. “If for no other reason than few have ever accurately predicted the commodity price.”

The APPEX Global 2018 Prospect and Property Expo will be Feb. 27-March 1 at the Business Design Centre in the Northern London Borough of Islington.

Lakin described the coming expo as an “excellent post-crash opportunity for established players with money or access to capital, whilst entry prices and operating costs remain low.” He also noted some “early evidence of funding coming back from the London equity markets to compete with the private equity money that has been one, if not the only source of upstream funding of late.”

“The choice of deals with less competition from many other buyers will likely be seen in the near future and questionably the perfect time to invest in E&P, if done wisely and based on sound technical and commercial risk criteria,” he said.

Primacy of G and G

To evaluate potential investments put forward at APPEX, Lakin can already see the early evidence of some E&P companies realigning their geologist and geophysicist teams in preparation for the return to more stable, even buoyant times again.

“Geologists and geophysicists are still the only people that can actually find oil and gas, even if engineers, lawyers, bankers and accountants and entrepreneurs like to think they can,” he noted. “Don’t get me wrong, all these skills are equally essential to manage, fund, finance, negotiate and legalize this great industry, but finding new commercial quantities of oil and increasingly gas, remains the domain of the subsurface explorationists as clearly evidenced by the many new global plays discovered in the last cycle.”

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If the recent evidence of an uptick in acquisitions and divestiture activities continues, the next APPEX Global event in London should coincide with many new international prospects in the first quarter of 2018. But if this proves to be correct, the A&D bargain-bin environment won’t last much longer, said the event’s chair, Mike Lakin of ENVOI Limited in London.

At some point, he said, the effect of the industry’s recent downturn will rub away, as has always happened historically when E&P companies return to the market after the slow-down and seek new deals to replace and rebuild their prospective upstream portfolios.

“When the oil price will come back sufficiently for this to happen is anyone’s guess, although I believe it will be sooner than most of the so-called experts are now predicting,” Lakin said. “If for no other reason than few have ever accurately predicted the commodity price.”

The APPEX Global 2018 Prospect and Property Expo will be Feb. 27-March 1 at the Business Design Centre in the Northern London Borough of Islington.

Lakin described the coming expo as an “excellent post-crash opportunity for established players with money or access to capital, whilst entry prices and operating costs remain low.” He also noted some “early evidence of funding coming back from the London equity markets to compete with the private equity money that has been one, if not the only source of upstream funding of late.”

“The choice of deals with less competition from many other buyers will likely be seen in the near future and questionably the perfect time to invest in E&P, if done wisely and based on sound technical and commercial risk criteria,” he said.

Primacy of G and G

To evaluate potential investments put forward at APPEX, Lakin can already see the early evidence of some E&P companies realigning their geologist and geophysicist teams in preparation for the return to more stable, even buoyant times again.

“Geologists and geophysicists are still the only people that can actually find oil and gas, even if engineers, lawyers, bankers and accountants and entrepreneurs like to think they can,” he noted. “Don’t get me wrong, all these skills are equally essential to manage, fund, finance, negotiate and legalize this great industry, but finding new commercial quantities of oil and increasingly gas, remains the domain of the subsurface explorationists as clearly evidenced by the many new global plays discovered in the last cycle.”

He also foresees the continued growth of advanced exploration technologies, including extra-high-resolution gravity and magnetics and more use of cost effective remote sensing, surface geochemistry and seep analysis to help target the most prospective play areas and enabling improved seismic acquisition, including higher resolution 4-D seismic, to be far more effectively targeted with associates cost savings and reduce exploration risk.

Back to Basics

Perhaps surprisingly to some, Lakin expects the best A&D opportunities to be found in straight-up conventional oil and gas plays.

“Not many pure resource players appear to have actually made as good returns as the conventional players,” he noted.

“The stock markets are littered with dead exploration companies that got caught up in their own excitement and forgot the simple success metrics of proper G and G-led exploration with a spread of assets — with overhead covering production to allow for progressive development of appropriately risked exploration prospects as part of a balanced portfolio — so that the inevitable unsuccessful E&P don’t break the company,” said Lakin.

“Those who have done this right over time, even through the crash, have survived and some have quietly done exceptionally well,” he said, adding, “essentially going back to the future in the same way most of the successful E&P companies have always done it.”

Global Prospects

That’s not to overlook the challenges inherent in global exploration and production.

Geopolitics matter, Lakin said, and the special circumstances of each prospect have to be analyzed carefully. Still, he sees attractive opportunities coming available.

“Plenty (of opportunities) are placed around with many new and underexplored plays areas the world in South America, Africa and Australiasia, but the sheer scale and distance makes anything small challenging, as well as some of the political risk, wars and culture,” Lakin observed.

“Conventional America — deserted presently by most traditional funding sources due to the resource boom — along with Europe, are still very prospective in parts where they’re not closed down by local anti-frac’ing and emotional bureaucracy,” he said.

Good prospects can be found in many other areas of the world as well, Lakin noted, although non-exploration risk and high risk, complex political realities can dampen their attractiveness.

“CIS (Russian Commonwealth) and Asia offer excellent geology but the political — and in many parts also personal risks — can be high. Australia is still an interesting place with much potential and increasing high gas prices, but it remains remote and, for many, an airplane too far,” he said. “The Far East is tough due to complex geology and has generally high government takes. Russia and China are still to have their day for most E&P companies due to their political complexities.”

Shrinking the Bubble

In assessing any proposal, operators and investors will do well to stick to the basics and make sure the economics remain manageable where the geological risk is right, Lakin advised.

“The old adage of finding the source rocks first when targeting the conventional plays, combined with the new technologies that can commercially stimulate tight conventional plays. And all managed within modest company overheads covered by production cash flow, and not just debt or equity-market promise,” he said.

Lakin questioned the underlying profitability of many unconventional plays, especially with U.S. oil prices hovering around $50 a barrel. He sees an increasing sector concern that the bubble-like quality to resource plays, outside a few secure areas and by the early entrants.

“The bubble has yet to burst, or hopefully simply deflate, but I believe it will,” Lakin said. “I hope it does deflate and balance rather than burst, and I believe this may well be the case as oil prices will come back more quickly than predicted — due in part to the incremental annual increase in global demand and the decline and lack of investment in conventional fields (which are still responsible for more than 90 percent of the world’s oil supply), which is estimated to have been less than 50 percent of the investment needed to maintain such fields, (which are) declining at an average of 5-9 percent annually over the last three years, and the inability of even a rebalanced resource sector to fill the gap.”

“And when it does, the money will switch back to conventional E&P players focused on high quality G&G who have a track record of finding oil and gas and generating long term values,” he predicted.

Overall, the winning approach likely will be “good sound geology for conventional and profitable tight conventional plays, which may still need stimulation with frac’ing as they have always done,” combined with improved technologies to enhance E&P results and field life.

Skills Gap

“That said, technology is probably only half the story as more mistakes and human error may end up being made with the looming G&G experience loss and knowledge-base decline as the older generation retires, and cannot not be replaced due to the generation of G&G people not employed in the last 1984–2003 crash, which has left a massive hole in the expertise treadmill,” Lakin said.

“Perhaps the industry will realize soon that the writing has been on the wall as the G&G expertise age demographics have clearly shown for some time, where we will have no option to employ many of these older folks as mentors and advisers with their irreplaceable experience, or face the E&P consequences,” he added.

On the one hand, he sees “plenty of experienced people appear to be looking for work now, but too few when the E&P sector really turns.”

This loss of experience, knowledge and expertise in the oil and gas industry — a result of the Great Crew Change and recent layoffs and retirements – troubles Lakin.

The result is a significant gap between the experienced professional workforce over 54 rapidly leaving and the contingent of new hires younger than 35 slowly coming on board, and Lakin warned that the industry has to “mind the gap.”

“To put this in context, an experienced U.S. geologist mentioned at NAPE earlier in 2017 that he’d recently employed a young geologist who had never seen a conventional log and would not quite believe how good the reservoir quality was,” Lakin said.

International Deal-Making

The first-time APPEX expo-goers might find Islington a surprisingly comfortable place to conduct international E&P deal-making with many of the worlds key A&D people all under one roof. Lakin described it as removed from the overcrowding, rush and distractions of many other less specific industry shows that can be found in other parts of the world.

“The venue is the best in London for such an event,” he said. “And we’ve been there for 14 or more years, so people are familiar with the space and comfortable with APPEX’s reputation for international deal-making.”

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