Permian Scorcher
SOONER OR LATER, the Permian Basin’s breakneck A&D pace seems bound to falter. Oil prices continue to idle while 150 acres of Texas scrub brush can command roughly the same price as a posh Manhattan townhouse.
According to John England, vice chairman and U.S. oil and gas leader at Deloitte LLP, with Permian prices bidding up, some companies are looking elsewhere—even to the Vaca Muerta in Argentina.
“I think we’ll see people maybe spreading their bets a little bit more going forward,” England said at a Sept. 21 press briefing at the 2016 Deloitte Oil & Gas Conference.
For other sectors of the oil and gas industry, some form of consolidation may be coming. Midstream companies may have a better chance closing a deal than wading through protestors and regulations. Oilfield service companies, at the same time, may look to align their interests with fellow companies.
“This recovery in many ways mimics the pattern of the recovery from the Great Recession,” England said. “If last year was the year of hard decisions, 2017 will be the slow road back.”
But companies recognize that even as prices recover, the industry likely won’t fully recover until 2018 or beyond.
Most executives believe that $60 per barrel is an important threshold for a revival in U.S. E&P activity, according to Deloitte’s 2016 oil and gas industry survey released Sept. 21.
Pay for play
E&Ps are expressing cautious optimism, England said.
It helps that debt markets, which had been effectively closed to the industry, are beginning to open, said Ray Ballotta, M&A transaction services partner at Deloitte.
Equity markets have continued to be bullish on the sector, Ballotta said.
Independent, onshore E&P companies have tapped equity markets to the tune of $19 billion during the past year despite the depressed price of oil.
“While the proceeds of these offerings have been used to reduce debt and strengthen balance sheets, healthier companies have and will continue to utilize proceeds to fund acquisitions in core positions,” he said.
Most E&P companies offering shares have publicly indicated that proceeds will be used to acquire acreage, and the public markets have accepted this strategy.
“But there’s one major catch,” Ballotta said.
Investors are focused only on the most viable and cost-effective locations—largely the Permian and the Scoop and Stack plays in Oklahoma—where producers can turn a profit. The snag is that prices are rising exponentially.
In the second quarter, 13 companies announced transactions in the Permian with an average price of $17,000 per acre.
By the third quarter, the implied deal value per acre ranged between $20,000 and $40,000 per acre.
“The reason for that is the lower price differential relative to market and relative to Henry Hub given their proximity to market,” Ballotta said. “And they’re also a potential source for LNG.”
While MLPs have largely gone dormant in the current market, many survey respondents expect a moderate level of midstream consolidation in 2016 and 2017.
“Consolidation is increasingly seen as a strategy for growth where building new pipe has become harder to execute with opposition and regulations that have delayed getting projects off the ground,” Ballotta said.
Rice Energy Marches On Marcellus In $2.7 Billion Deal
RICE ENERGY INC. has struck a deal to acquire Vantage Energy LLC’s Marcellus acreage in the vaunted Greene County, Pennsylvania, core as well as rights to the Utica and Barnett shale plays.
Rice, based in Canonsburg, Pennsylvania, will pay $2.7 billion for Vantage, which had filed documents Sept. 13 with the Securities and Exchange Commission to conduct an IPO. The transaction consists of $2.1 billion for Vantage’s upstream assets and $600 million for its midstream assets.
The deal is a turnabout for Rice, which earlier this year had bid $200 million for Alpha Natural Resources Inc.’s core Marcellus and Utica acreage. However, Englewood, Colorado-based Vantage made an end-run to snatch up the acreage with a $339.5 million bid.
By 2017, the company expects the acquisition to generate 70% year-over-year growth.
The deal increases Rice’s overall acreage by 55% and swells its number of Marcellus locations by 65% while positioning it as the largest leaseholder in Greene. Vantage has 72 producing Marcellus wells that “de-risk the acquired asset base,” Rice said.
The company also said that, pro forma the deal, its enterprise value will rise to $9 billion from about $6.3 billion.
In the second quarter, net production on Vantage’s assets was 399 million cubic feet equivalent per day (MMcfe/d), with 65% from the Appalachian Basin and 35% from the Barnett.
Rice appears to have gotten a reasonable deal for Vantage’s assets at $10,600 per acre, said Jonathan D. Wolff, an equity analyst at Jefferies.
The price excludes the $600 million midstream purchase and gives no value to the Barnett acreage. Wolff valued the acquired production at $3,000 per flowing MMcfe.
“This compares to the recent Greene County acreage sale [that Vantage bought] at about $12,400 per acre,” Wolff said.
It remains to be seen how Rice intends to increase margins through improved transportation as well as what it plans for the Barnett.
The deal stands to enhance growth for Rice Midstream Partners LP, as well.
All of Vantage’s Pennsylvania acreage will be dedicated to Rice Midstream, “which already has a substantial gathering business in Greene County,” Wolff said.
Rice acquired midstream assets that include 30 miles of dry gas gathering and compression assets. The company owns about 55% of Rice Midstream’s units.
Daniel J. Rice IV, Rice CEO, said the deal represents the largest core dry gas Marcellus acquisition to date and called it transformational for the company.
“This acquisition adheres to our proven strategy of pursuing core shale gas acreage, leveraging our industry-leading technical shale team to deliver best-in-class well results and capturing a greater share of the value chain through our premier midstream services business,” he said. “Our transaction financings are meant to strengthen Rice Energy’s balance sheet even further, including positioning us to capture an additional 20,000 to 40,000 acres of leasehold adjacent to our existing position.”
Rice plans to offer 40 million shares of its common stock to the public to fund part of the acquisition. The transaction is expected to close in fourth-quarter 2016.
The effective date of the transaction is Sept. 1, and closing is expected by year-end.
Marathon Oil Deals West Texas, New Mexico Assets
MARATHON OIL CORP. continues to sell noncore assets, saying Oct. 3 it has a buyer for its nonoperated, conventional CO2 and waterflood assets in West Texas and New Mexico. Marathon will collect $235 million for the assets.
The position averaged about 4,000 barrels of oil equivalent per day (Mboe/d), 90% oil, in the first half of 2016. Marathon will eliminate more than 10% of the 34 Mboe/d it produces from other U.S. conventional onshore assets, said Tom Driscoll, managing director at Barclays Research in an Oct. 3 report.
In April, the Houston-based company said it would divest $950 million in assets from its Wyoming upstream and midstream operations. Since August 2015, Marathon has announced or closed noncore asset sales of more than $1.5 billion.
“Investors will likely be pleased that MRO continues to increase its focus on its core assets, but the transaction is unlikely to materially impact investor views,” Driscoll said.
Marathon’s sale price equates to an attractive $59,000 per boe/d and $63,000 per boe/d when converting oil to gas at a 20-1 ratio. “This compares to an MRO trading multiple of about $49,000 and $70,000, respectively,” Driscoll said.
Marathon’s management doesn’t expect to push through many large deals, but will likely continue to prune its portfolio to reduce its “relatively high” debt load, Tudor, Pickering, Holt & Co. said.
“Though [the] amount of reserves was not given, valuation looks positive versus recent deals,” the firm said in an Oct. 3 note.
Splashdown: Anadarko Lands $2 Billion Gulf Deal
ANADARKO PETROLEUM CORP. said Sept. 12 it agreed to buy Freeport McMoRan Oil & Gas’ deepwater Gulf of Mexico (GoM) assets for $2 billion.
The deal doubles Anadarko’s ownership to about 49% in the Lucius development and adds production of 80,000 boe/d, more than 80% oil. The company will partially fund the deal through an equity offering.
The Woodlands, Texas-based Anadarko said the acquisition will generate about $3 billion in incremental GoM free cash flow during the next five years at current strip prices. The deal will also allow the company to accelerate capital into the Delaware and Denver-Julesburg (D-J) basins.
Al Walker, Anadarko chairman, president and CEO, said Freeport aggressively drilled during the past two years and that most of those expenses are now complete.
“We don’t see much more than maintenance capex in front of us,” Walker said during a Sept. 13 conference call. “This extremely attractive bolt-on property transaction was accomplished by purchasing assets at a very attractive price from a motivated seller.”
Walker said the bolt-on transaction is a catalyst for the company’s oil-growth objectives.
Capital One Securities Inc. analysts said in a Sept. 13 report that the deal “should pay out in just over two years at the current strip without doing anything upon closing.”
The deal and onshore activity acceleration will increase Anadarko’s net asset value by roughly 7%, Capital One said.
Detractors will point to the dilution of U.S. shale exposure as the deepwater GoM and international production mix increases to about 31% from 20%, the analysts said, as well as the “rationale of buying free cash flow-generating GoM assets to ultimately accelerate U.S. onshore [i.e., why not issue $2 billion in equity and directly accelerate?]”
The deal is, overall, positive for Anadarko, but it’s unclear how investors will digest the news. The unexpected transaction is an accretive GoM acquisition funded via equity.
By comparison, investor expectations were for “further asset divestitures leading to a U.S. onshore acquisition,” said Pearce Hammond, senior research analyst at Piper Jaffray & Co.
Anadarko also said Sept. 12 that it will offer about 35.3 million shares of its common stock. The company expects to grant the underwriter, J.P. Morgan Securities LLC, a 30-day option to purchase up to 5.3 million additional shares of its common stock.
Anadarko will add two rigs in both the Delaware and D-J basins later this year and plans to further increase activity.
Walker said the company’s expectation is to more than double production to 600 Mboe/d from the two basins during the next five years.
“This increased activity would drive a companywide 10% to 12% compounded annual growth rate in oil volumes over the same time horizon in a $50 to $60 oil-price environment, while investing within cash flows,” Walker said.
The company’s GoM position, with the addition of the properties, will have net sales volumes of about 155 Mboe/d. The purchase expands Anadarko’s operated infrastructure in the GoM as well.
It is Phoenix-based Freeport’s third divestiture following announced deals to sell net mineral acreage in the Permian and nonoperated interests in the Haynesville for a total of $189 million.
Resolute Switches To Buy Strategy With Delaware Basin Deal
RESOLUTE ENERGY CORP. switched into growth mode with a $135 million acquisition that will boost its net acreage position in the Delaware Basin by 25%, the company said Oct. 4.
The Denver-based company entered a definitive agreement with Firewheel Energy LLC, a portfolio company of EnCap Investments, to acquire certain properties consisting of 3,293 net acres in Reeves County in West Texas.
After accounting for flowing production, the price tag comes out to about $26,400 per acre, which is in line with other “quality” Delaware acreage, said David Tameron, senior analyst at Wells Fargo Securities LLC.
Resolute now holds 16,450 net acres in Reeves. The company’s 22,400-gross-acre position in Reeves remains essentially unchanged as Resolute already owns interests in all of the same properties.
About 95% of the acreage and substantially all of the production and proved reserves are located within the Resolute-operated Mustang project area in Reeves; the remainder of the acreage is also in Reeves.
The deal gives Resolute higher interest in the production and cash flow generated from the company’s operated wells, further leveraging the work of its field staff, which “makes sense,” Tameron said in an Oct. 5 report.
“The fact that the vast majority of the acquired acreage is nonop interest in Resolute’s existing project means that the company won’t have to meaningfully increase activity as a result of the transaction to bring value forward, which should help the company achieve satisfactory burdened returns,” he said.
The deal includes interests in 13 horizontal and 15 vertical wells with production of about 1,200 net boe/d. Proved reserves are an estimated 6.2 MMboe with a PV-10 value of $45.8 million. The deal also adds 47 net drilling locations.
In addition, the acquisition includes Firewheel’s interest in the earn-out agreement with Caprock Permian Processing LLC and Caprock Field Services LLC. Following closing of the acquisition, Resolute will receive 100% of all payments from Caprock under the agreement.
The $135 million purchase price for the Delaware assets is comprised of $90 million in cash and $45 million worth of Resolute’s common stock to Firewheel.
Resolute plans to finance the acquisition with proceeds from a private offering of preferred stock and borrowing under its revolving credit facility, which is currently undrawn. The company’s liquidity is expected to drop to between $73 million and $80 million following the cash payment, Tameron said.
The deal comes after nearly two years of Resolute unloading about $385 million worth of assets in order to trim its debt.
In July, Resolute said it entered into a series of related agreements with an undisclosed Permian midstream company to sell West Texas gas gathering and water handling systems for up to $110 million. The company plans to use proceeds to reduce debt and to fund development activity in the Delaware.
In 2015, Resolute sold three property packages with proceeds of nearly $275 million that were used to pay off outstanding bank balances. In addition to its midstream assets, the company has evaluated the monetization of its New Mexico properties.
BMO Capital Markets and Petrie Partners LLC were financial advisors to Resolute on the Delaware acquisition. The transaction is effective Sept. 1, and closed Oct. 7. —Emily Moser
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