The domestic energy industry is rapidly evolving with new technology and new focus areas throughout the country.
The capital market that is funding the renewed energy activity is changing rapidly to keep up.
“I have regarded there to be a consistently good level of private equity money available for this industry for quite some time,” said Curt Launer, energy research analyst at Deutsche Bank in New York. “But it's gone in ebbs and flows and in different places from time to time.”
Today, that private money is available throughout much of the oil and natural gas industry, said Mihoko Manabe, vice president and senior credit officer at Moody's Investors Service in New York.
“Private equity money will go where the opportunities are,” Manabe said. “There are a lot of opportunities in energy right now. There is investment opportunity all the way down the energy value chain, from upstream production to midstream to distribution channels downstream.”
The trend is benefiting Oklahoma energy companies at all stages, including Tapstone Energy LLC, which was recently founded by former SandRidge CEO and founder Tom Ward.
“Today is the first time in decades that you have access to private capital,” Ward said at the Bloomberg Energy Conference in Houston last month. “When we started SandRidge and Chesapeake, the private equity market was different than it is today. If you wanted to run a company of any size, you had to be in the public market because that's where the capital was.”
Continental Resources Inc. CEO Harold Hamm has tried his hand at several investment options.
Hamm operated Continental as a privately held company for decades before taking it public in 2007. While the company is now publicly traded, Hamm still controls 68 percent of its stock.
Hiland Partners was publicly traded from 2005 to 2009 until Hamm bought it back and made it private again.
“One thing about being publicly traded is that the availability of capital is better and generally the borrowing rates are lower,” Hamm said.
Continental used its inflow of capital from becoming publicly traded to help it develop the Bakken field in North Dakota.
“I couldn't have accelerated into it as quickly without the availability of the cash and capital brought about by us going public,” Hamm said. “I couldn't have maintained the position we have up there. That would have been impossible in that instance.”
As a publicly traded company, however, executives work for the shareholders and lose some of the control of the direction of the company.
Public companies also have drawn increasing attention from activist shareholders.
While funding is available for most segments of the energy industry, one area that seems to be attracting particular attention is the master limited partnership.
Most of the companies in the top 10 of this year's Oklahoma Inc. ranking of the state's top-performing companies are master limited partnerships focused on pipelines, processing plants and other midstream oil and natural gas activity.
“What is most attractive about MLPs to investors is their yield,” said Deborah Fleming, executive in residence at Oklahoma City University's Meinders School of Business.
“What they do is offer a yield that is more attractive, more like bonds than stocks over a longer term. One of the reasons people have loved some of the MLPs that have come out is because not only have they achieved very, very attractive yields, but they also have had price appreciation in the unit.”
Oil and natural gas producers are increasingly spinning off their midstream assets into master limited partnerships while retaining the general partner interests of the new company.
“Companies find MLPs attractive because they can sell assets to the MLP and still retain control of those assets,” Manabe said. “It's like having your cake and eating it, too. It also places value on a business that perhaps didn't get too much attention when it was part of a larger company.”
Chesapeake Energy Corp., SemGroup Corp. and Williams Cos. Inc. have followed the pattern in recent years.
Devon Energy Corp. recently announced plans to partner with Dallas-based Crosstex Energy LP to form a master limited partnership. OGE Energy Corp. this summer combined its midstream subsidiary with Houston-based CenterPoint Energy Inc. to form Enable Midstream Partners.
Master limited partnership investors receive favorable tax benefits from MLPs, but the partnerships also carry risks, Manabe said.
“From a bondholder's perspective, the MLP finance model is a riskier model because they pay out all their free cash flow. It limits their financial flexibility,” she said. “Also, MLP investors are looking for continual growth. To be able to do that, MLPs need to constantly acquire other companies or undertake construction projects. That usually entails acquisition risk or project execution risk.”
But the demand continues to grow.
“I think we're going to be hearing about MLPs for a while,” Manabe said.