The global energy industry is experiencing one of its greatest transformational upheavals in modern history, lead by the onslaught of significant increases in U.S. oil and natural gas production from the new shale plays over the last few years.  OPEC has tried to kill these globally game changing plays by taking advantage of their own low cost production and maintaining their volumes even in the face of 5+ million new barrels per day of production from the U.S. tight shale plays.  This, of course, is a gamble as even though their move has forced dramatic drops in oil prices thereby at least temporarily achieving their goal of damaging the US oil industry, it has also forced prices down to well below their own social breakeven costs.  The combination of this game of chicken between the U.S. energy industry and OPEC is also unfolding during a period of great general economic uncertainty in global equity, debt, currency, and political arenas further complicating everyone’s ability to plan for the future with confidence.  

At some point Saudi, Nigeria, Venezuela, and even Russia will have to face their hungry populations and may be forced to throw in the towel, which will be bullish for oil prices.   And, even though the U.S. energy industry is doing its best to quickly adjust to the new pricing environment, most of the shale and tight oil plays require pricing well above current levels to be sustainable in the medium and long term.  This will eventually contribute to a sustained higher price environment as well.  Additionally as OPEC, Russia, China, and recently even Canada move away from buying and selling petroleum in U.S. dollar denominated transitions, the ability of oil (and natural gas as it become more of a global commodity) to preserve and build portfolio value will be amplified.

In the meantime, the historically low energy prices have forced many energy companies and their lenders to grapple with assets, or even entire companies that have lost significant value and no longer cash flow in the current price environment.  As this fall’s lenders Borrowing Base recalculation season begins debt laden energy companies are being forced to restructure their balance sheets thereby causing more and more good energy asset to be offered for sale at increasingly favorable prices.  Large swaths of the patch are becoming strategic sellers.  Soon many will be desperate sellers.  At the same time, only a few energy companies have the cash and strong balance sheets needed to take full advantage.  This is creating one of the greatest buyers markets in a generation, especially for non-traditional energy investors with plenty of cash to invest.  The combination of unsustainably low oil and natural gas prices, leading to very large volumes of good upstream assets that must be sold at favorable prices over the next 18 months, and the reduced cash flow and leverage liquidity current available to the majority of energy companies that would traditionally be buyers of these assets have spring loaded the market for very strong investment returns over the coming few years.   In essence, what has typically been a very capital efficient divestiture market is quickly becoming quite capital inefficient.  

These conditions mean that many good energy assets will be sold at very favorable valuation in the next several quarters.  However not all energy assets are created the same.  Some have serious operating, development, and basin risks which, if acquired unwittingly, could greatly reduce ones chances of optimizing this particularly favorable investing environment.  For a private capital investor to take full advantage of the current opportunity they need to partner with energy investing and operating professions that fully understand the risk adjusted return potential of a specific play type, basin, and asset.  We believe to fully optimize this rare investing opportunity an investor should focus on producing assets that allow for an investment exit horizon of no more than 3 years, have material underdeveloped reserves, are in active basins, have low drilling costs, and stacked pay.  Blue Tip Energy has the needed sector specific expertise, experience, track record, and integrity to help take full advantage of this rare moment in time.  If you wish to learn more about this concept and how we plan to take advantage of it please call Rich DiClaudio (281.944.3805) or Bruce Taylor (281.944.3802).