Monetization of Oil-Gas Price Differentials

The energy sector has been one of the few bright spots in the global economy over the past five years and the unconventionals revolution is creating waves that will carry through the economy, including infrastructure and manufacturing. We acknowledge the many challenges for energy investing – beyond the traditional sub-surface risks that always present difficulties – including: Surging gas supplies have created a very weak price environment in several regions of the world; Shortages of infrastructure and take-away capacity have created bottlenecks, leading to significant market price differentials; and, A frenzy of investment activity in the upstream sector – both organic and M&A – has led to some relatively high transaction prices. The same trends behind these challenges create windows of opportunity – in both public and private markets, and at both the company and project levels. The unconventionals revolution has led to an abundance of low-cost natural gas, and sources of supply around the world growing faster than the demand or take-away capacity of their surrounding infrastructure. Coupled with high oil prices, this has created wide price gaps between gas and oil on an energy-equivalent basis. Oil is nearly six times the price of natural gas on an energy equivalent basis, and we do not see this disparity disappearing soon. Thus, many investors are looking at real asset investments to exploit the price arbitrage. This arbitrage investment activity will eventually drive a closer indexation of gas prices to oil, but we are many years away from that. We see this discontinuity creating several actionable real asset investment theses, and outline some of what we are seeing in liquids, gas, and the supply chain technology and services