[Editor's note: A version of this story appears in the July 2018 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Upstream megadeals, and even half-billion dollar deals, appear to have taken off the first half of the year.

There is no reason to panic. E&Ps are still jostling for better positions.

Most analysts’ data show deal activity to be flat or declining and deal values nosediving compared to last year, depending on which deals are counted. Some scorekeepers start their deal-o-meter at $20 million transactions, others at $50 million.

Lost in these stats is the underappreciated art of the acreage swaps, which don’t come with a flashy, easily calculated sticker price. Permian Basin trades that shift 55,000 net acres from one company to another don’t count.

E&Ps find themselves in the odd circumstance of holding ambitions in check despite rising oil prices. Competing agendas are pulling at them.

On the one hand, they want to impress investors with buybacks and dividends. But oil and gas companies are also looking for ways to expand production, replace reserves and add acreage, according to a June 11 Moody’s Investors Services report.

William Marko, managing director at Jefferies, said deal flow has been dead since investors insisted on a reset of cash flows.

Deals are no longer valued by dollars per acre or development plans, Marko said at Hart Energy’s DUG Permian conference in May.

“It’s really about cash flow,” he said. “Tell me what the EBITDA is this year, next year.”

Like dead fish and guests, debt continues to trouble E&Ps.

Consider Devon Energy Corp.’s (NYSE: DVN) June announcement to sell its EnLink Midstream stake for $3.125 billion. The company upped its share buybacks to $4 billion from $1 billion and knocked out 40% of its consolidated debt.

But Fitch Credit Ratings noted in a June 6 report that Devon’s leverage will actually increase due to the lost cash flow that had been received from EnLink’s distributions. Devon is among the few companies to materially knock down debt by sacrificing cash flow.

Even with average May spot oil prices up 44% year-over-year and companies preaching and practicing financial discipline, E&Ps’ credit is “considerably weaker” than in the 2013 to 2014 boom years, Moody’s said.

Moody’s expects only a small minority of E&P companies to make enough cash to repay debt in 2018 to 2019 at oil prices of $55/bbl.

It’s worth debunking, for a moment, a common myth that prices are more stable. Comparing the first 15 weeks of 2017 with 2018, the variance in WTI spot prices is double what it was last year. So far, April has been the most turbulent. Yes, 2018 feels better, but it’s been bumpier.

Even at current prices, companies’ leverage will improve on higher cash flows, not actual debt reduction, according to Moody’s.

Some companies have been able to successfully access public equity markets and Marko said he sees “equity coming back in the near term.”

Until markets fully embrace E&Ps again, companies’ potential for deals may lie in their ability to swing a trade.

Travel back to February, a month before Concho Resources Inc. (NYSE: CXO) warped the Permian’s space-time-money continuum with its plans for a $9.5 billion merger with RSP Permian Inc.

In February, Concho said it would trade 34,000 net acres in the northern Delaware Basin to a major oil company—likely Chevron Corp. (NYSE: CVX)—for 22,000 net acres in Culberson County, Texas. The net production gain for Concho was 2,000 boe/d and a consolidation of its Mabee Ranch area.

Value unknown—but this is a big chunk of important real estate.

Without other means to transact, companies may start trading more than they already have.

Last year, Chevron executed about 40 acreage trades. Goodrich Petroleum Corp. (AMEX: GDP) swapped Haynesville acreage, and Matador Resources Co. (NYSE: MTDR) makes a habit of trading assets, including what it called a “key trade” in first-quarter 2018.

At the end of May, Bonanza Creek Energy Inc. (NYSE: BCEI) modified its credit agreement, in part, to give the company “greater flexibility to participate in asset swaps.”

In June, Lilis Energy Inc. (AMEX: LLEX) said it entered into an acre-for-acre trade of about 1,500 net acres in Winkler and Loving counties, Texas, in the Delaware. The deal additionally increased Lilis’ production by up to 15% compared to its 6,500 barrels of oil equivalent per day in May.

The value of these trades—which often add longer lateral opportunities by blocking up acreage—is tricky to calculate. Capital One Securities estimated Lilis’ deal added PDP value of up to $40 million, and acreage in Lilis’ neighborhood is pricey.

Trade lives on. For now, acreage swaps may be the most economic (and under the radar) alternative to buying and selling.

Darren Barbee can be reached at dbarbee@hartenergy.com.

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