Spokane Journal of Business

Cheaper U.S. energy said helping manufacturers compete

Increase in natural gas production contributing to favorable price trend

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The U.S. manufacturing industry is competing globally again, thanks to lower natural gas prices and a renaissance in the oil and gas energy sector, said panelists at a recent "Perspectives on the Energy Industry" forum sponsored by Houston-based law firm BoyarMiller.

But while more investors are injecting capital into the industry, the lack of sensible long-term energy policy and fragile global economies continue to have an impact on investor confidence.

"The energy industry is a significant driver for Houston's growth and an important part of our practice," says Bill Boyar, BoyarMiller's founder and former chairman. "We host the Energy Forum each year providing current trends and developments to help our clients stay ahead of the curve and make smart, informed business decisions."

Held at The Houstonian Hotel, BoyarMiller'sprogramfeatured David Pursell, managing director and head of securities with Tudor, Pickering, Holt & Co.; Tom Hargrove, managing director with GulfStar Group; and James Wallis, vice president of Lime Rock Partners.

Pursell called for the construction of new pipeline in the Keystone project.

"Reversing the flow in segments of existing pipeline rather than building new pipe according to specifications is insufficient," he said. "A significant amount of the heavy crude from Canada is already being transported to the Gulf Coast by rail and will continue to do so for the next decade."

Carbon emissions reached a 20-year low in the first quarter of 2012 and the U.S. has seen reduced CO2emissions in the last five years, Pursell said. This is due to less expensive natural gas replacing coal for power generation.

"For years, we couldn't grow natural gas production, and now we are doing it with fewer and fewer rigs," he said. "This is the best thing that has happened to the U.S. economy, especially in the manufacturing sector driven by natural gas and electricity, making it cheaper and globally competitive."

U.S. law prohibits the export of domestic crude oil, Pursell said. The increased supply, combined with the export ban means there will be a disconnect between the pricing of crude in the U.S. and everywhere else. The U.S. crude oil will become cheaper, and the refiners can export refined product, which is good for the Gulf Coast refineries and our area.

"The producers are becoming victims of their own success, making less money due to the increased supply of oil and natural gas," Pursell said. "The people who will profit are companies who transport and refine it."

Hargrove said that in the state of capital markets in the energy industry, middle market merger-and-acquisition activity is driven by public companies, whose stock prices are at attractive levels and who have high cash balances; private equity buyers with large amounts of liquidity; and lenders who are becoming aggressive again with cash flow-based lending. These activities contributed to a growing number of transactions in 2012, which surpassed the number of deals in 2008.

Many transactions were completed in the fourth quarter of 2012 because of a pending increase in the capital gains tax in 2013.

"An estimated 80 percent of the wells are now non-vertical and from the capital standpoint, horizontal drilling requires more equipment, services, and people than vertical drilling," Hargrove said. "The Gulf of Mexico has recovered from the Deepwater Horizon spill with increased activity in deep-water exploration. We see new rigs moving into the market and once-rare deep water production platform orders are now on backlog."

Hargrove added, "There is a huge demand for capital from pipeline service companies. The introduction and enforcement of stricter U.S. Department of Transportation regulations; heightened concern over pipeline safety and maintenance after several high profile incidents; the adoption of the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011; and the required hydrostatic testing and repairs on all pipelines constructed before 1970 all contributing to stable recurring revenues from maintenance."

"New pipelines are needed to transport product from the unconventional oil and gas fields from production areas to processing facilities," he said. "Pipeline construction miles are projected to increase to approximately 41,000 in 2013, up from 36,000 in 2012, and total pipeline construction expenditures are expected to reach $41 billion in 2013—a $7 billion increase from 2012."

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