Excess Supply Leads to Near Record Low Prices
Global excess supply of cheap natural gas pushed down prices to near all-time lows, pressuring the financials of large oil and gas companies. The price of natural gas closed at $2.19 per million British thermal units at the end of 2019, a 26% decline since last year. The number of nationwide gas rigs in 2019 dropped by 28% to 132, compared to 184 in 2018. Declining wind and solar energy costs and the increasing production of fuel in Qatar, Russia and Australia all pose as headwinds to natural gas prices in the short- and intermediate-term. However, a report from Ernst & Young offers some optimism to the industry – pointing out that the cyclical gas market is at the bottom of the cycle – signaling that gas prices are due to rebound.1 2
Aging Power Lines Create Headache for Utility Providers
A report by California’s commission finds Pacific Gas & Electric (PG&E) to have improperly maintained one of its powerlines causing one of the nation’s deadliest forest fires, complicating its bankruptcy plans. Failure to emerge from bankruptcy in 2020 will block PG&E from accessing the state’s wildfire fund – meant to shield large utilities from wildfire related costs – and setback the company’s turnaround plan. Aging power lines remain a constant concern for utility providers because strong wind currents can snap them off, creating a serious fire hazard in dry, heavily wooded areas. To ease the burden of private companies and control up-keep, local municipalities have been analyzing the possibility of purchasing the powerlines from private companies.3
Aramco Goes Public with a $1.7 trillion Valuation
Saudi Arabian Oil. Co. (Aramco) IPO was valued at $1.7 trillion, marking it as the world’s largest IPO in history. Aramco sold 3 billion shares, or 1.5% stake of the company, at Saudi Arabia’s Tadawul stock exchange for $8.53 (35.2 Saudi riyals) per share, raising $25.6 billion and potentially up to $30 billion with stock options. The raised funds will be allocated to investments in entertainment and other sectors in Saudi Arabia to diversify the country’s economy. Since the IPO, Aramco shares have risen, and the market cap has reached $2 trillion.4 5
Decreased Regulations for the Coal and Gas Companies
The Trump administration reduces burdens on the fossil fuel industry by eliminating regulation and slashing federal government oversight. Staffing at the E.P.A. is at a decade low, and a third of federal advisory boards that provide technical advice were ordered to shut down. Climate and environmental research groups saw decreases or no funding. The latest moves aim to support coal and oil extracting companies, reverse past inefficiencies brought by excessive regulations, improve global competitiveness and bolster an expanding U.S. economy.6
China Continues to Increase Coal Consumption
China increases coal consumption as it prioritizes economic growth and energy security above its climate change initiative. Experts expect the coal usage to grow at an annualized rate of 2.5% to 2.9 billion tons of coal equivalent by 2020. Rising coal consumption is also supported by increased infrastructure investments to combat slowing GDP growth. This comes at a time when China faces a decelerating economy further dragged down by a trade war with the U.S.7
Light Bulb Efficiency Rules Will Not Increase
Incandescent lightbulb manufacturers benefit from the Trump administration’s decision to freeze light-bulb efficiency rules. Less efficient, pear-shaped bulbs avoided being economically unviable as the rule prevented their prices from skyrocketing to more than four times to $8 per bulb brought by higher manufacturing costs. Consumers will enjoy more choices, more savings at the store but pay higher electricity bills, collectively amounting to $14 billion annually.8
Increased Growth in Transmission Projects and Energy Plants
In 2018, about 2,500 planned or newly built transmission projects and 900 new renewable energy plants were completed in the U.S. In the same year, transmission-related operations grew to $11.4 billion, compared to $6.7 billion in 2009. The rise in building activity has raised some local concerns. A proposed $1.2 billion, 300-mile line project between Oregon and eastern Washington faces opposition by local communities as they believe the project will disrupt wildlife, heighten wildfire risks and ruin the aesthetics of the Oregon Trail. Opponents of the project advocate for more green energy use prefer to solve the issue by generating more renewable energy locally, a blow to long-distance power line initiatives.9
Largest Transactions Closed
- Buckeye Partners, L.P.
- IFM Investors Pty Ltd
- All Alaska Operations of BP p.l.c. and BP Pipelines (Alaska) Inc.
- Hilcorp Alaska LLC
- SemGroup Corporation
- Energy Transfer LP
- Gathering System and Pipeline in the Haynesville Shale Formation
- DTE Michigan Gathering Holding Company
- Dominion Energy Cove Point LNG, LP
- Brookfield Asset Management Inc.
- Kinder Morgan Cochin LLC
- Pembina U.S. Corporation
- Central Penn Pipeline
- NextEra Energy Partners, LP
- Thermal North America, Inc.
- Antin Infrastructure Partners S.A.S.
- Connecticut Water Service, Inc.
- SJW Group
- Cube Hydro Partners, LLC/Helix Partners, LLC
- Ontario Power Generation Inc.
This report represents transaction activity as mergers & acquisitions, consolidations, restructurings and spin-offs. Targets are defined as U.S. Based companies with either foreign or U.S. based buyers. Transaction information provided is based on closed dates only.
EBIT - Earnings Before Interest and Taxes