This interview with Houston based-partner Mike King takes a look at the role joint ventures have played in the US shale plays.
How would you characterize the companies that first entered the shale plays?
King: The majority of companies at the forefront of shale development were mostly smaller US independents rather than the larger industry participants. At least initially, these early movers in the shale had a few advantages. They were frequently a little bit more flexible and capable of moving at a faster pace than some of their larger competitors. They were able to establish sizeable footprints in the first shale basins before their larger competitors could evaluate them and decide what to do with them.
What changes have you seen the in demographic of shale participants in the past four years?
King: Shale development is a very capital-intensive process, and many of these smaller companies tend to be a little bit more exposed to fluctuations in the commodity, equity and debt markets. During the financial crisis that started in 2007, many found themselves unable to obtain new borrowings to finance their development activities, and they were also further subjected to borrowing-base redeterminations under their existing credit facilities with lower natural gas prices, which further squeezed their available capital.
This resulting cash crunch forced many of these independents to monetize their assets. While some sold out all-together, those that wanted to stay in the shale saw joint ventures as a means of doing so. Some of these larger, cash-rich companies — in many cases IOCs and NOCs — were happy to oblige because, not only did they think it was a good, sound economic investment, it also allowed them the opportunity to acquire some of the technology and expertise that took the early movers in shale years to develop.
Is the joint venture market showing signs of slowing down?
King: Not really. New shale opportunities are continuing to be discovered and evaluated, and the need for capital to develop these new assets (as well as the existing plays) remains. Further, as natural gas and natural gas liquids prices remain low, the shale participants with a portfolio slanted towards those commodities can rely less on existing production for cash flow to fund additional development activities, and will be forced to look for additional sources of capital.
As we have learned over the last several years, joint ventures are an attractive financing source. I expect that we are far from the end of the US shale joint venture cycle.