energy

Energy

The growth of the digital economy—and of a global middle class—directly translates into energy demand, accounting for some 55% of expected demand growth over the next 25 years. A wide variety of sources are expected to fulfill this need, with a focus on less carbon-intensive sources such as natural gas, nuclear, solar, and wind. Nonetheless, oil and natural gas will still represent 60% of the energy mix, with natural gas especially featured for growth. The new U.S. administration is less committed to the environmental policies of the previous government, but major energy producers operate in multiple markets committed to meeting the 2015 Paris Agreement on Climate Change. Recent technology advances offer a wide array of energy choices that will enable more lower-emission energy sources to increase their market share; by 2040, renewables will be approaching 25% of global energy supplies.

Our Partners' Perspectives

What is the key trend to watch in terms of leveraged finance opportunities in the energy industry over the next 12 months?

Coming out of 2016, positive sentiment about commodity prices has resulted in increased investment activity in the energy market and encouraged the continued diversification of participants in the energy finance market. Given this resurgence in investment activity and the deepening of the investor base, we expect to see a decrease in both bankruptcy cases and out-of-court restructurings and a steady uptick in new money financing transactions, including acquisition financing, RBL refinancings, term loans, and high-yield transactions.

Lindsay Sparks

Houston

What is the biggest challenge—and opportunity—for master limited partnerships (MLPs) in the year ahead?

MLPs’ biggest challenge continues to be capital costs. When the capital markets are working efficiently and borrowing costs are low, the incentive distribution right (IDR) model—where general partners are paid an increasing percentage of distributions—can help jumpstart growth. However, with organic growth opportunities currently limited in the midstream space, IDRs become a strain on capital costs. This can spur an uptick in M&A and GP restructurings where the general partner either acquires the MLP or the MLP exchanges IDRs for common units. As MLPs seek either investment grade status or an improved credit rating to reduce capital costs, there will also be a move to consolidate.

Doug Getten

Houston

What trend or development do you see having the greatest impact on the outlook for energy projects in Europe this year?

The unstoppable growth of renewables has coincided with declining margins and demand, thanks to a mix of slower economic growth and greater energy efficiency. Utilities have had to redirect efforts towards customer-centric models and services to extract more value from the downstream supply chain and secure greater customer share. The intermittent nature of renewables ensures conventional generation will remain an important part of the mix of energy services (capacity, balancing, and other grid supports). EU regulators will be forced to balance market sustainability and security with general EU state aid policies and financial regulations. Infrastructure funds have been moving beyond traditional assets to become aggregators of renewable portfolios.

Lorenzo Parola

Milan

What do you see as the biggest U.S. regulatory challenge facing our energy clients in the year ahead?

Energy companies must contend with significant uncertainty about how dramatically the Trump Administration will depart from the Obama Administration’s efforts to address climate change. With 2016 the warmest year on record and the third year in a row to set a new record, states like California and other countries like China will continue moving forward, whether or not the U.S. takes the lead. The clean energy revolution will likely continue unabated due primarily to market forces. And because planning for most major energy companies extends well beyond four years and accepts the reality of a carbon-constrained future, any pause in domestic efforts poses significant questions and risks for companies that must compete globally for investment and customers.

Kevin Poloncarz

San Francisco

In terms of disputes and litigation, what are the top trends that will impact our energy clients this year?

The downturn in the oil market generated the expected mix of disputes characteristic of recessions: bankruptcy, restructuring, workouts, and employment matters. A number of funds and partnership-related cases are working their way through the courts. The U.S. energy industry is now in recovery mode and—with the hopeful stabilization of commodities pricing—faces cautious growth prospects in the year ahead. This growth, however, will certainly encounter challenges, including the potential shift in U.S. trade policy. Should current rhetoric become legislative reality, changes and/or the collapse of NAFTA will impact not only outbound investment and imports, but also U.S. relations with its two energy-rich NAFTA neighbors. In addition to diplomatic challenges, current contracts and commitments with both Canada and Mexico are potentially exposed, with any significant changes likely to spur litigation.

Sam Cooper and Joy Dowdle

Houston

First fully completed restructuring of an emerging markets oil production company

Highlights of Our Client Successes

Gulf Oil’s US$1.9B financing

We represented Morgan Stanley Senior Funding, Inc., Barclays Bank PLC, and Wells Fargo Securities, LLC as lead arrangers in a US$1.15B senior secured first lien term facility, the proceeds of which were used to fund a dividend recapitalization and refinancing and consolidation of debt facilities associated with ArcLight’s portfolio companies Gulf Oil Limited Partnership, Penn Products Holdings, LLC, and Chelsea Petroleum Productive Holdings, LLC. The financing contains pioneering provisions regarding future joint ownership of the companies by ArcLight and a master limited partnership. In a related transaction, we also represented BMO Capital Markets Corp. and Morgan Stanley Senior Funding, Inc. as the lead arrangers in the upsizing of the asset-based revolving facility to US$775M, with tailored cross-priority intercreditor arrangements.

First fully completed restructuring of an emerging markets oil producer

We advised Gulf Keystone Petroleum on its recently completed financial restructuring. Gulf Keystone is the leading independent operator and producer in the Kurdistan Region of Iraq and the operator of the Shaikan field. It is a UK-listed company with a very wide range of shareholders. The restructuring resulted in a completely new long-term capital structure for the company. Using a UK Scheme of Arrangement, all the existing balance sheet debt (New York law-governed bonds with a total nominal value of US$625M) was converted into equity and $100M of new bonds. With this substantially reduced debt and a stable structure in place, the company is now able to complete the rollout of its capex plans for the field. This marks the first fully completed restructuring of an emerging markets oil production company.

Swisspower expands renewables portfolio

We advised Swisspower Renewables AG on its acquisition of Sorgente II, the holding company that controls 14 different vehicles owning a portfolio of 27 renewables plants across Italy. The portfolio—which includes hydroelectric plants, solar factories, and wind farms—has an aggregated yearly production capability of up to 250 GWh. This acquisition furthers Switzerland’s Masterplan 2050, the country’s innovative clean energy strategy.