COAL, GAS AND OIL PRESENT AND FUTURE

Transcription

1 COAL, GAS AND OIL PRESENT AND FUTURE January 27, 2017 Prepared For: EEANA ANNUAL MEMBERSHIP MEETING Energy Ventures Analysis, Inc N. Moore Street, Suite 1200 Arlington, VA (703)

2 ABOUT ENERGY VENTURES ANALYSIS, INC. EVA was founded in 1981 by senior level subject matter experts in fuel and power markets with a focus on consulting to executives at power companies, transportation firms, and producers. Over time, the firm increased the diversity of its energy commodity expertise, the quality of the data it develops, and developed forecasts to support its client s needs. In 2009 EVA transformed itself, adding standardized and integrated, North American based forecasting services for: Power Gas & Oil Coal Renewables Environmental EVA s standardized forecasting services currently includes: Daily for natural gas markets Monthly three year outlooks for natural gas and oil markets Quarterly integrated three year outlooks for all Annually integrated 20+ year outlooks EVA s clients find value in our datadriven analysis, modeling and forecasts with summary commentary that allows for the focus on the important trends within these markets EVA s approach is validated through our unparalleled expertise in the data often constructing our own where none is available and through backcasting and scenario modeling and analysis 2

3 COAL OUTLOOK 3

4 HISTORICAL COAL PRODUCTION (1,000 TONS) Coal production down 18% between 2011 and Most of the reduction occurred between 2014 and Based upon three quarters reported production, annualized 2016 production could be down over 30% compared to 2011 All regions affected. Many reasons: low gas prices, effectively flat electricity demand, increased generation from renewables, coal plant retirements, strong U.S. dollar, and an unfriendly regulatory climate top the list. 4

5 CURRENT DEMAND FOR U.S. COAL (MILLION TONS) U.S. TOTAL E Total Production 1, , , , , , , Electric Power Receipts 1, Electric Burn 1, Stockpile Change (19. 3) (3. 4) 8. 5 (42. 9) (4. 4) (34. 5) Coke Ovens Commercial/Industrial Domestic Consumption 1, , , , Export Metallurgical Export Steam Total Exports Power sector dominates demand for U.S. coal (80 90%) Exports are an attractive market but typically only when U.S. dollar is weaker than it is today. 5 5

6 POWER SECTOR GENERATION Power Generation by Source (Thousand MWHs) Power Generation by Source (Share of Production) 6 6

7 STEAM COAL PRICES $/short ton $ $ $ $ $ $ NAPP 13,000 Btu, 4.5#SO2 FOB rail CAPP 12,500 Btu, 1.6#SO2, FOB rail ILLB 11,500 Btu, 5.2#SO2 FOB barge Rockies CO 11,700 Btu, 1% Sul FOB rail $ PRB 8,800 Btu, 0.8#SO2 FOB rail $ $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 Jan 05 Jun 05 Nov 05 Apr 06 Sep 06 Feb 07 Jul 07 Dec 07 May 08 Oct 08 Mar 09 Aug 09 Jan 10 Jun 10 Nov 10 Apr 11 Sep 11 Feb 12 Jul 12 Dec 12 May 13 Oct 13 Mar 14 Aug 14 Jan 15 Jun 15 Nov 15 Apr 16 Sep 16 In the last decade, coal prices have become quite volatile. Consumers with staggered contracts do not experience this volatility. 7 7

8 POWER SECTOR COAL STOCKS 8 8 Source: EVA Coal Stockpile Report

9 MET COAL PRICES $360 Benchmark Prices ($/mt) $1.20 $300 $1.00 $240 $0.80 $180 Australian Prem. HCC USD/AUS Exch. Rate (right) $0.60 $120 $0.40 $60 $0.20 $ Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 $ The Hard Coking Coal Benchmark price in USD/tonne is set quarterly between Australian producers and the Japanese steel mills. Typically the stronger the U.S. dollar, the lower the price in US dollars. Price tripled at the end of 2016 as a result of several factors. Most notably, China restricted number of production days and weather issues in Australia. 9

10 INDUSTRY ACTIVITY The challenging coal market in 2015 and first half of 2016 resulted in the bankruptcies of a number of large coal producers. Over 40 percent of U.S. coal production 2016 was from companies in bankruptcy or companies that had recently emerged from bankruptcy. The bankruptcies were driven by some combination poor markets/low prices, high debt incurred to a period of market optimism, legacy liabilities related to labor agreements and closed mines, and self bonding. Reclamation bonds are required for each mining permit. Traditional bonding is primarily through sureties, performance bonds or cash bonding. A number of states allowed the producers to effectively use their balance sheet to bond their reclamation obligations which is what is referred to as self bonding. The problem occurred when the states determined the producers no longer met the financial criteria for self bonding and the states did not have the financial wherewithal to replace the bonds. Biggest problems were in WV and WY. 1 10

11 11 DISPOSITIONS IN RECENT MAJOR US COAL BANKRUPTCIES ARE TELLING Bankruptcy Disposition Date Company Court Regions Status Issues Core Assets Non Core Assets Subsequent Events 7/7/2012 Patriot I Missouri (transferred from NY) CAPP, NAPP, ILB Completed Spin off of assets from Peabody, merger with Arch spinoff Magnum, significant legacy liabilities Reorganized Bankruptcy 4/7/2014 James River Virginia CAPP, ILB Completed Acquired IRP at market peak Blackhawk Fortress, Revelation Fortress Bankruptcy 5/12/2015 Patriot II Virginia CAPP, NAPP, ILB Completed Failed to extinguish legacy liabilities in first Chapter 11 Blackhawk ERP Compliant Fuels 7/15/2015 Walter Energy Alabama SAPP, CAPP, Completed Aquired Western Energy at market First Lien Holders ERP Compliant Fuels Canada peak, UMWA Warrior Met Coal 8/3/2015 Alpha Virginia CAPP, NAPP, Completed Acquired Massey Energy at market First Lien Holders Reorganized Debtor PRB, ILB peak, legacy liabilities Contura 1/11/2016 Arch Coal Missouri CAPP, NAPP, PRB, ILB, Rockies Completed Aquired ICG at market peak Reorganized 4/13/2016 Peabody Energy Missouri ILB, PRB, Rockies On going Acquired McArthur Coal in 2011; unable to complete sale of noncore assets Goal to Reorganize Initial buyers were strategic buyers either with market optimism or a need to raise capital for ongoing operations 2015 bankruptcies demonstrated insufficient capital to fund acquisitions. Core assets for both Walter and Alpha went to first lien hold holders when auctions failed to obtain higher bids. First lien holders are not believed to have plans for a long term presence in the coal industry. Non core assets are being disposed of in distress sales with either no money changing hands or money being paid to discharge liabilities. 11

12 SHORT TERM COAL FORECAST (MILLION TONS) Demand Supply US Coal Demand (mmt) Electric Burn Stockpile Change 42.0 (28.4) (41.0) (8.0) - Electric Receipts Coke Ovens Comm./Indust Domestic Receipts Export Metallurgical Export Steam Total Exports Total Demand Includes Import, PC, WC US Coal Supply (mmt) Northern Appalachia Central Appalachia Southern Appalachia Illinois Basin Powder River Basin Rockies Lignite and Other U.S. Production Import, PC, Waste Total Supply Producer stock & unaccounted (5.7) (6.0)

13 IMPLICATIONS OF THE ELECTION Short term coal forecast does not reflect any changes as a result of the election. Many promises were made with respect to relaxation of regulatory requirements related to coal production and consumption Many promises made to bring back coal jobs The most important regulations on the demand side include: Clean Power Plan Effluent Limitation Guidelines (ELG) Cross State Air Pollution Rule (CSAPR) Update which modified the budgets for seasonal NOx Industry consensus is that the Clean Power Plan and the CSPAR Update will be gone; Outlook for ELG s less clear but most likely at risk. New long term forecast will be different. 1 13

14 IMPLICATIONS OF THE ELECTION Situation is fluid with utilities continuing to announce coal plant closures Announced closures are being driven by low natural pricing and regulatory requirements The $64 million question is what happens if the regulatory requirements are eliminated. Is there time to save the plants? Utilities are less interested in coal that they had been previously Low gas prices challenge coal plant dispatch Environmental groups are promoting renewables and gas Regulated earnings are driven by new investment, not in continued operations of existing coal plants Without the regulatory burden, regulated utilities will be challenged to demonstrate economic benefits of plant closures. The future for coal comes done to gas 1 14

15 FUTURE SUPPLY AND DEMAND FOR GAS Future supply is all about shale. Conventional gas production is expected to remain relatively flat while shale gas is expected to continue to grow Market for gas according to DOE is projected to grow in power, industrial and other sectors. Non power markets are expected to command higher pricing Natural Gas Production (MMCFD) Offshore Onshore Shale Tight Sands Coalbed Methane AEO 2016 Natural Gas Demand (BCF) Residential Commercial Industrial Power Other 15

16 SHALE GAS 16

17 PRICES SET FOR A TURNING POINT EXHIBIT 13: HISTORICAL AND FORECASTED HENRY HUB PRICES ($/MMBTU) $10 ($/MMBTU) $9 Historical Era of $8 'Game Changing' $7 Shales $6 $5 $4 $3 $2 $1 $ Era of Gas Bubble Source: NGW and EVA, Inc High Priced Era Forecasted 2016 EIA NYMEX

18 EXPORTS TO MEXICO SET TO INCREASE Gas exports to Mexico will exceed the volumes exported as LNG in the short term Exports to Mexico enabled by: Comparatively low U.S. gas prices Opening of Mexico s market to foreign investment $10B to $20B being invested in U.S. and Mexican pipelines Rising gas demand in Mexico s power and industrial sectors By YE2016 U.S. will have 8.4 of BCFD export capacity to Mexico Canadian exports to U.S. are rising Main driver is the Montney shale play, aided by exchange rates and prices EXHIBIT 10A: NET CANADIAN IMPORTS 8.0 (BCFD) Historical EXHIBIT 6A: NET MEXICAN EXPORTS (BCFD) Historical Forecasted Forecasted

19 LNG EXPORTS Global price of LNG is supporting growth in LNG Exports Sabine Pass in operation; Cove Point next Additional permit applications are under way US LNG Exports (BCFD) Sabine Pass LNG Cove Point Freeport LNG Cameron LNG Corpus Christi LNG Elba Island Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19 19

20 INDUSTRIAL GAS DEMAND POISED FOR GROWTH Industrial consumption off because of low macro Capacity additions bode well for future demand EXHIBIT 3B: INDUSTRIAL CAPACITY EXPANSION PROJECTS No. of Projects Demand (BCFD) Announced Permit Received Under Construction Online No. Demand No. Demand No. Demand No. Demand No. Demand No. Demand No. Demand No. Demand For period , 47 projects came online (1.5 BCFD). 2. For period , 62 projects to come online (3.9 BCFD). 20

21 GAS INDUSTRY HEALTH Financial health of industry a concern: (toxic debt) Over 80 bankruptcies 45 bankruptcies with at least $100 MM in debt Default rate for oil and gas sector 25%, whereas average for other sectors is under 2% Survey of 44 companies notes 85% of operating cash flow used for debt service 21

22 WORLD OIL Near term growth in demand with flattening demand long term WORLD OIL PRODUCTION (MBD) It is now clear that long term world oil supply exceeds long term world oil demand As a result, prices are unlikely to return to past highs. Market pricing balance appears to be in the real $50 $70/barrel range. There will be regular tension in the market to balance supply and demand that will cause prices to go above and below equilibrium levels Non-OPEC OPEC WORLD OIL DEMAND (MBD) OECD LDCs Ex-USSR/Central Eur China 22

23 THANK YOU Questions? Emily Medine