Biweekly, we highlight three things going on in the energy industry that we think you should know about. This week, we take a look at the driving forces behind the recent two-year high in oil prices, a new report on gender diversity in energy technology and services, and a bidding war over a Canadian energy infrastructure company. Here’s the latest.
1. Oil hits two-year high on demand optimism and supply restraint
Oil prices hit a two-year high on Friday with West Texas Intermediate at $69.62 per barrel and Brent crude at almost $72 per barrel. The rising prices are driven by a number of factors including increased global demand, OPEC+ supply restraint, U.S. shale players’ commitment to capital discipline and even the weakness of the dollar.
As the vaccine rolls out and COVID-19 restrictions continue to lift, car and airplane travel is on the rebound. Air passengers rose last month to levels only a fifth lower than the same period in 2019, and the number of travelers passing through Transportation Security Administration checkpoints in U.S. airports reached 1.96 million on May 28. That’s the largest number since March 2020 and only about 22% less than peak travel on the same holiday weekend in 2019, according to Bloomberg.
On the road, drivers traveled only about 4% fewer miles in March than they did in the same month during 2019, signaling a return to almost normal road congestion, also according to Bloomberg. (April data from the Federal Highway Administration will be released in mid-June.)
While demand is on the rise, global oil production remains well below 2019 levels. Rystad projects all major oil producers’ June output will be 5% lower than in June 2019. OPEC+ supply discipline remains intact with the recent decision to stay the course on agreed-upon supply limits. Outside of OPEC+, supply restraint can be seen as U.S. shale producers are adding only limited rigs to production. This was evidenced by a decline in the U.S. oil and gas rig count in the week of June 4, according to Baker Hughes.
U.S. shale producers, specifically public exploration and production companies, have shown production restraint and are focused on capital discipline and free cash flow upon pressure from investors. The chart below shows that production declined at a slower pace in non-OPEC countries (mainly the United States, China and Canada) and has also rebounded more quickly.
In the short term, we expect supply to remain somewhat suppressed due to voluntary and mandated production restraint and demand to rise as the public emerges from the pandemic, creating an environment for higher oil prices ($65 to $75 per barrel). However, certain factors will influence the longer-term supply and demand forces in the energy sector. Given the political landscape, the trend of underinvestment in exploration and development and the acceleration of the energy transition, both supply and demand are expected to face headwinds in the longer term.
2. Gender diversity lags in energy technology and services sector
A new report from the Houston-based national trade association Energy Workforce & Technology Council found that additional progress is needed to achieve greater gender diversity in the energy technology and services sector. The 2021 Inclusion & Diversity Study noted that women make up 47% of the overall U.S. workforce in 2021, but only 19% of the workforce in the oil and gas extraction, refining, construction and mining sectors. The study was completed by the Energy Workforce & Technology Council in partnership with Accenture PLC.
The study surveyed 25 companies globally, covering approximately 250,000 energy service workers. The report found that representation of women in top leadership or high-ranking executive positions is particularly lacking; women occupy less than 9% of these roles when it comes to technical and operating functions, according to the study.
The last time the council conducted the study, in 2018, women made up 16% of the energy technology and services sector workforce. The council at the time set a target for the industry to increase that number to 20% by 2020, and this year’s results narrowly fell short of that goal.
These types of targets have become commonplace in energy company reports on environmental, social and governance (ESG) issues, and failing to meet them by implementing recruitment, retention, and advancement improvements can result in lower margins due to higher borrowing costs. (You can read more about ESG and the rise of sustainable financing in the industry here.)
In addition to facility improvements to create a comfortable and inclusive environment, energy service companies will need to focus on actively increasing entry-level recruitment of women, providing flexible work programs and sufficient paid parental leave for employee retention, adopting and promoting education programs on unconscious bias in the workplace, developing a pipeline of female talent for leadership roles, and offering competitive and equal compensation to advance gender diversity.
3. The battle for Inter Pipeline
There were two increased bids in early June for Calgary-based Inter Pipeline Ltd. from Calgary-based rival Pembina Pipeline Corp. and Toronto-based asset manager Brookfield Infrastructure Partners LP, with the competing bids offering distinct considerations for shareholders.
Brookfield initially made public its unsolicited $7.1 billion takeover bid for Inter Pipeline in February, and Inter Pipeline’s board of directors rejected the offer. Inter Pipeline later announced that it would consider a comprehensive review of strategic alternatives for the company, and Pembina on June 1 expressed intent to acquire the company for $8.35 billion. The following day, Brookfield raised its bid to $8.48 billion.
Inter Pipeline has accepted Pembina’s proposal, but the ultimate decision will depend on shareholder votes. One factor at play is that Pembina’s offer fluctuates with its share price; Brookfield’s offer is 74% cash while Pembina’s is 0.5 shares for every Inter Pipeline share. Because of this, the two bids also differ in terms of their tax implications; Brookfield’s would trigger capital gains or losses to shareholders, while Pembina’s would result in a tax-deferred share conversion.
Brookfield is currently Inter Pipeline’s largest shareholder, and Pembina aims to appeal to shareholders by increasing the dividend and emphasizing the tax deferral aspect with its bid by exchanging shares.
It remains to be seen exactly how this situation will shake out. If Pembina and Inter Pipeline were to combine, it would create one of Canada’s largest energy companies, and could result in savings of $200 million annually as a result of the two companies merging pipeline infrastructure.
Regardless of whether Pembina or Brookfield ends up with the winning proposal, it will continue a record year for merger and acquisition activity in Canada, particularly in the energy sector where Canadian upstream M&A in the first quarter outpaced U.S. activity for the first time since the fourth quarter of 2014. We wrote about Canadian energy consolidation in February and we expect the trend to continue as companies seek to scale up capacity while driving down costs, especially in an environment of regulatory uncertainty for the industry.
