A&D Watch

Yet Another Billion-Dollar Permian Deal

OCCIDENTAL PETROLEUM Corp. will take control of 35,000 net Delaware Basin acres while shoring up its resource base in a $2 billion deal, the company said Oct. 31.

It’s the fifth Delaware deal to rocket past the $1 billion mark. Houston-based Oxy said the company purchased producing and nonproducing leasehold acreage in the Permian as well as interests in EOR and CO2 properties and related infrastructure. The deal was made with multiple, undisclosed parties.

The purchase price, subtracting production value, is about $42,000 per acre, said Guy Baber, senior research analyst at Piper Jaffray & Co.

“We believe this is the second-highest price paid for Delaware acreage this year, trailing on the recent RPS/ Silver Hill deal, which was done at $46,000- $50,000 per acre,” Baber said.

The deal apparently disappointed investors who had watched Oxy remain content on the sidelines, Tudor, Pickering, Holt & Co. said. TPH analysts saw strategic value in adding more core and operations in the Barilla Draw area. “However, it does highlight one of our legacy concerns with the Oxy portfolio, which boasts about 1.5 million net acres in the Permian with only TPH estimates of 20% to 25% core unconventional exposure,” the analysts said.

The company’s 2017 production growth guidance of 5% to 8% on roughly $3.6 billion capex seems reasonable and should generate about $4.5 billion in cash flow at $50 per barrel (bbl). Oxy still faces a cash flow gap of $1.4 billion, which the company believes can be backfilled with noncore asset sales.

The acquisition was funded from cash on hand, Baber said. The company’s second-quarter cash balance of $3.75 billion could decline to $1.3 billion by the close of 2016—when also factoring in projected outspend in the second half of 2016. In the Southern Delaware, Oxy added acreage in Reeves and Pecos counties, Texas, in areas where the company already holds working interests.

The acquisition:

• Includes production of about 7,000 net barrels of oil equivalent per day (boe/d, 72% oil) from 68 horizontal wells;

• Adds an inventory of about 700 gross horizontal drilling locations targeting the Wolfcamp A and B and Bone Spring as well as potential for additional zones; and

• Boosts the company’s leasehold Delaware position to nearly 59,000 acres.

Oxy’s acquired working interests in producing oil and gas CO2 floods and related EOR infrastructure add production of 4,000 boe/d (80% oil). Oxy also gains net proved developed producing reserves of about 25 MMboe and total proved reserves of approximately 41 MMboe.

“These transactions further complement and solidify Occidental’s dominant position in the Permian Basin,” Oxy president and CEO Vicki Hollub said. “They leverage our existing infrastructure, utilize our strong balance sheet and create additional operational synergies.”

Synchronized Deals: SM Energy Buys Midland, Sells Williston

SM ENERGY CO. played switch hitter to A&D perfection, simultaneously buying in the Midland Basin and selling in the Williston Basin in deals collectively valued at $1.885 billion, the Houston-based company said Oct. 18. In the Williston, Oasis Petroleum Inc. agreed to buy SM Energy’s 55,000 net acres for $785 million.

Fourth-quarter production on the acreage is expected to average 12,400 boe/d, the Houston company said. In the Midland Basin, SM acquired 35,700 net acres in Howard and Martin counties, Texas, for $1.1 billion. SM’s Midland acquisition boosts its position 43% to 82,450 net acres.

The purchase from QStar LLC and an undisclosed party adds production of about 2,400 boe/d. Houston’s QStar, formed in 2013, is backed by EnCap Investments LP and led by CEO Gerald R. Carman.

The Howard acreage complements and is partially contiguous to the company’s recently closed $980 million Midland acquisition. SM will pay $1.1 billion cash and issue 13.4 million shares of stock to QStar, reminiscent of RSP Permian Inc.’s cash and large stock transfer in an Oct. 13 Delaware Basin deal valued at $2.4 billion. Its sale of the Williston’s Raven/Bear-Den acreage to Oasis will partially offset the cost. T

he price will continue some questions that Wall Street analysts have about late entrants to the Permian and what that means for development and economics, said David Tameron, senior analyst at Wells Fargo Securities.

Brian Velie, an analyst at Capital One Securities, said the near doubling of SM’s Midland acreage and the acceleration of development plans will add about $2/share to the company’s net asset value (NAV).

SM did not give a breakdown of its new acreage in Howard and Martin counties, but the area matches SM’s pre-existing footprint. SM plans to accelerate its drilling plans on the acreage.

Preliminary plans for Midland include adding a fourth rig in the fourth quarter and increasing to six rigs in early 2017, said Jay Ottoson, SM president and CEO. “We continue to work to concentrate capital on the highest return programs and generate higher company-wide margins, which drive cash flow growth and value creation for our shareholders,” he said.

Ottoson said the acquisition establishes significant scale for the company. “We are particularly excited about the performance and future potential of Howard County, leading us to further core up our portfolio and focus on this fast emerging, top tier area,” he said.

SM has swiftly upsized its Permian inventory through acquisitions. The company reported a growth of more than 4,171 locations since January, when it had roughly 734—a five-fold increase.

No mirage

Oasis said its Bakken buy is a natural fit to its Williston territory, though the company appears to have paid a premium for locations. Overall, the deal value is worth roughly 19% of Oasis’ enterprise value.

The purchase price was about $285 million more than KeyBanc Capital Markets’ $500 million estimate for the Raven/Bear-Den acreage, analyst David Deckelbaum said. “

The valuation works out to about $5,200 per acre adjusted for production, but about $4 million per core location, which appears a bit rich,” he said.

However, Oasis will inherit estimated fourth-quarter production of about 12,400 boe/d. The company expects to operate about 75% of the properties based on proved reserves. For SM, the value of the Bakken assets exceeded Capital One’s estimates, raising the company’s NAV by another $2/share.

“SM didn’t have to market its (excluding Divide County, N.D.) Williston position for long,” Velie said. “Roughly two weeks after putting [it] on the block, SM found a buyer in Oasis. The transaction gets a scattered capital- starved asset out of SM’s hands and into an operator with nearby activity and acreage.”

Thomas B. Nusz, Oasis chairman and CEO, said the acquisition fits into the company’s existing core and extended core positions and increases its gross operated drilling locations there by 25%. “With our continued capital efficiency and best-in-class operations in the Williston Basin, we are well-positioned to take full advantage of this complementary asset that we believe will generate substantial shareholder accretion based on our currently anticipated acquisition financing,” Nusz said.

While the deal could present lateral length synergies for Oasis, Deckelbaum said it “lacks meaningful accretion.” “Pro forma, we estimate that the deal is roughly 3% accretive to [revalued net asset valuation] but will slightly expand 2017 valuation multiples,” he said.

Oasis will fund the deal with an offering of 40 million shares for proceeds of roughly $420 million. Most of the acreage is near the company’s Wild Basin area or scattered across McKenzie County, N.D.

Petrie Partners was exclusive financial advisor to SM Energy. Jefferies LLC was financial advisor to QStar and EnCap Investments. SM said its acquisition is expected to close by mid-December with an effective date of Sept. 1. The divestiture is expected to close in early December, with an effective date of Oct. 1.

Clayton Williams Divests Eagle Ford For Permian Purity

ANOTHER PURE PLAY Permian Basin company is born. Clayton Williams Energy Inc. said Oct. 24 that it will sell its oily East Central Texas Giddings asset to an undisclosed party for $400 million. The transaction will free up capital for the company’s Delaware Basin holdings in Reeves and Ward counties in Texas. Some of the proceeds will also be used to pay debt.

The Giddings Field produces about 3,900 boe/d, 80% of which is oil. The deal will lop off about one-third of the company’s second-quarter 2016 production; Giddings’ proved reserves were 9.7 MMboe as of Sept. 30. The company, based in Midland, Texas, has about 160,000 net acres in the field.

Clayton Williams sold its acreage for $1,500 per acre at an assumed price of $40,000 per flowing boe/d, Seaport Global Securities said in an Oct. 25 report. Clayton Williams’ focus will now turn to the Permian Basin, where it holds 170,000 net acres. The company had one rig drilling in Reeves as of Sept. 22.

“We are glad to see CWEI making a move in divesting the Giddings Field to focus on the Permian, especially in light of how much costs have come down in the Delaware Basin and drilling in the area has largely de-risked CWEI’s acreage,” said Irene O. Haas, an analyst at Wunderlich Securities Inc.

And more changes are afoot for Clayton Williams. The company said Oct. 24 that it has hired a new COO, Patrick G. Cooke. Cooke most recently managed Noble Energy Inc.’s Texas business unit, where he had direct management responsibilities over Noble’s Delaware assets. With a new team in place and a deal to sell an asset, which Haas put little value in, it’s still not clear how Clayton Williams will get back to growth.

“There is still a long list of unknowns,” Haas said. “We don’t know how much of the proceeds from the sale will go toward debt reduction and funding 2017 drilling. We don’t know what the new team has planned for 2017, such as capex, rig counts and production profile, and how fast the company can ramp up production in Reeves County to replace the Giddings production.”

Seaport Global said a two-rig program in second-half 2017 will help Clayton Williams de-lever faster. The firm also said it foresees more asset sales of noncore Permian acreage and a potential pipeline joint venture.

Goldman Sachs & Co. is financial advisor and Vinson & Elkins is legal advisor to the company on the transaction.

Anadarko Petroleum Bags $1.5 Billion In Sell-Offs

ANADARKO PETROLEUM CORP. finished up third-quarter 2016 with a monster A&D performance that included $1.5 billion in asset sales to go along with its purchase of U.S. Gulf of Mexico (GoM) assets in September.

Anadarko, based in The Woodlands, Texas, said Oct. 31 that it has a deal to sell its Carthage assets on the eastern border of Texas for more than $1 billion. The Carthage assets in East Texas produced 40,000 boe/d in the third quarter including 72% gas, 25% NGL and 3% oil.

The buyers were not disclosed.

Since the end of the second quarter, the company also closed more than $500 million in asset sales through divesting assets in Elm Grove, Hearne, Hugoton and Ozona, Texas, and in Adams County, Colorado. With the divestitures, the company exceeded its March goal of selling up to $3 billion worth of assets.

This year, Anadarko closed $3.08 billion in sales and, with the Carthage sale, will eclipse $4 billion. Buyers for the assets were not disclosed. Collectively, the assets produced 68 Mboe/d, most of it natural gas. That “implies a price paid of $22,000 per barrels of oil per day assuming modest value for non-PDP assets,” said Scott Hanold, an analyst at RBC Capital Markets LLC. “This is in line with other recent transactions with a similar commodity mix.”

Anadarko’s cash position will be cut by $1.8 billion to pay for its September acquisition of Freeport McMoRan Oil & Gas deepwater GoM assets for $2 billion. The deal doubles to about 49% Anadarko ownership in the Lucius development and adds production of 80 Mboe/d, more than 80% oil.

As a result of efforts to strengthen its financial position, both Moody’s and S&P recently improved their ratings on Anadarko to Stable. The company had a strong quarter overall, analysts said. Reported production was 780 Mboe/d, beating consensus forecasts of 755 Mboe/d. Anadarko’s production guidance in the fourth quarter is 696 Mboe/d and 717 Mboe/d, excluding divestitures, Baird Equity Research said.

The company said capex was down to $697 million, less than Wall Street’s consensus of $745 million, said Pearce Hammond, senior research analyst at Piper Jaffray & Co. Nevertheless, 2016 capex is estimated to be $2.95 billion at the high point, slightly tighter than its previous upper limit of some $3 billion. Anadarko also raised its Delaware Basin EUR by 1 MMboe, a 25% increase from an EUR of 800 Mboe. The EUR upgrade was at a 4,500 foot lateral length.

RSP Permian Buys Delaware Basin’s Silver Hill For $2.4 Billion

RSP PERMIAN INC. said Oct. 13 it will acquire Delaware Basin’s Silver Hill Energy Partners LLC in a deal valued at about $2.4 billion. The Dallas-based company plans to acquire Silver Hill for $1.25 billion in cash and 31 million shares.

Silver Hill controls about 68,000 gross (41,000 net) acres within the Delaware and produces about 15,000 boe/d. The acquisition adds another core in the Permian to RSP’s portfolio. The company already operates large, contiguous acreage blocks within the Midland Basin totaling about 63,000 net surface acres.

Excluding adjustments, RSP will pay roughly $40,000 per acre for Dallas- based Silver Hill. Silver Hill’s acreage is in Loving and Winkler counties in West Texas and includes 58 producing wells, 49 of which are horizontal. The deal also gives RSP Permian about 3,200 gross (1,950 net) total undeveloped locations in the Delaware.

Steve Gray, CEO of RSP, said the returns of Silver Hill’s horizontal wells compare favorably with the company’s Midland Basin assets. “We have been patient in our M&A efforts to ensure that we pursue accretive opportunities for our shareholders that enhance our already deep inventory of high-return horizontal locations,” Gray said in a statement. “We believe the assets of Silver Hill are located in the best part of the Delaware Basin and will be a perfect complement to our existing asset base.”

The transaction adds 50% more production to RSP, which averaged 29,761 boe/d in the third quarter, Securities and Exchange Commission filings show. RSP Permian plans to fund the acquisition through capital market transactions, which may include equity or debt offerings.

Silver Hill is comprised of two privately held entities controlled by affiliates of Kayne Anderson Capital Advisors and Ridgemont Equity Partners. Diamondback Energy Inc. was rumored to be in discussions to buy Silver Hill for $2.5 billion, but said Oct. 10 that they were no longer actively pursuing the acquisition. RSP Permian’s acquisition of both Silver Hill entities will have an effective date of Nov. 1. However, the two transactions will close separately—one in fourth-quarter 2016 and the other in first-quarter 2017.

Upon closing, Kayne Anderson, Ridgemont and other Silver Hill shareholders are expected to collectively own about 20% of RSP’s outstanding shares. In addition, RSP expects to add Kyle D. Miller, CEO of Silver Hill, to its board of directors.

RBC Capital Markets is lead M&A advisor to RSP and provided fairness opinions to its board. Barclays Capital Inc. is a co-M&A advisor. Vinson & Elkins LLP was the company’s legal counsel. Jefferies LLC is financial advisor to Silver Hill. Thompson & Knight LLP and DLA Piper LLP are its legal counsel. —Emily Moser

EQT Amasses More Marcellus Acreage For $680 Million

With $2.2 billion of cash to spend, EQT Corp. said Oct. 25 it picked up a few things in the Marcellus Shale in deals that add 59,600 net acres and hundreds of locations to its portfolio. The bulk of the acreage, located in West Virginia and Pennsylvania, comes from Trans Energy Inc. and affiliates of private E&P Republic Energy Inc. as well as undisclosed parties.

The deals may be in response to Rice Energy Inc.’s $2.7 billion purchase of Greene County, Pa., acreage from Vantage Energy LLC. “EQT is answering investors’ concerns on inventory after Rice’s acquisition of Vantage Energy,” said Charles Robertson II, an analyst at Cowen and Co.

In September, Robertson said EQT investors overreacted to the company not purchasing Vantage, arguing that Pittsburgh- based EQT had already expanded with its $407 million purchase of Statoil ASA’s Marcellus and Utica acreage. EQT’s newly acquired acreage produces 44 million cubic feet equivalent per day (MMcfe/d) of natural gas.

Trans Energy and Republic’s acreage includes 42 wells, 33 of which are producing. Much of the acreage is contiguous with EQT’s existing acreage, and lateral lengths can be more than doubled to 6,000 feet, the company said.

The Trans Energy and Republic acreage includes drilling rights on an estimated 29,000 deep Utica acres. EQT’s deal includes about 55,800 acres that are undeveloped. EQT is purchasing that acreage for about $9,400/ acre, adjusted for proved developed producing value, Scott Hanold, an analyst at RBC Capital Markets LLC, said in an Oct. 25 report.

“The price paid is reasonable and compares favorably to recent transactions in the region,” Hanold said. Marcellus transactions in 2016 include:

• September: Rice buys 85,000 net acres for $2.7 billion, or $13,500/ acre;

• June: Antero Resources buys 55,000 net acres for $450 million, or $7,500/ acre; and

• May: EQT buys 62,500 net acres for $407 million, or $4,500/acre. EQT said that its consolidation strategy in 2016 increased its core Marcellus position by 143,000 acres, or 55%, to 400,000 acres, including the Oct. 25 acquisitions.

The company estimates it has 3,680 undeveloped core Marcellus well locations. As part of the acquisition, EQT will merge with Trans Energy by acquiring all of Trans Energy’s outstanding common shares for $3.58 per share in cash. At closing, Trans Energy will become a wholly owned subsidiary of EQT. The transactions are expected to close by the end of the year.

GE Oil & Gas, Baker Hughes Plan Mega-Merger

BAKER HUGHES INC., left at the altar in the failed merger with Halliburton Co., will combine with GE Oil & Gas, the companies said Oct. 31. General Electric Co. and Baker Hughes said they will merge into a new oilfield technology company with a value of $32 billion. As part of the deal, GE, based in Fairfield, Conn., will give Baker Hughes shareholders’ a $7.4 billion sweetener, with shareholders receiving a special one-time cash dividend of $17.50 per share. The merger will create a “new Baker Hughes,” with GE owning a 62.5% majority interest in the company. Baker Hughes would hold the remaining 37.5% of the company.

The combined company will bolster its “competitive mettle” with competitor Schlumberger Ltd. at an opportune time in the oil and gas cycle, said Gautam Khanna, an analyst with Cowen and Co. Schlumberger added to its strength in April with its acquisition of Cameron International’s subsea and equipment manufacturing base. However, he said the company’s financial metrics are “so-so.” “The transaction is only marginally accretive to GE’s 2018 estimated EPS despite a sizeable use of GE’s M&A firepower,” Khanna said.

GE estimates a $0.04 (2%) accretion from the transaction. The deal employs $7.4 billion out of GE’s M&A war chest of about $20 billion. However, the transaction assumes a slow recovery of $45 to $60 per barrel (bbl) through 2019. GE and Baker Hughes said the company would create $1.68 billion in synergies through $1.2 billion in cost savings and about $400 million in annual revenue by 2020.

The deal is structured to put GE’s oil and gas assets under Baker Hughes’ control. In exchange, GE will own the controlling stake and control of the board of directors of the new company. GE and Baker Hughes said the combination will lead to cost savings over multiple business areas. The new Baker Hughes will be as much an oilfield services company as it will a technology enterprise driven by GE’s expertise. The new company will provide bestin- class physical and digital technology solutions for customer productivity, the companies said.

“Some of our earliest conversations centered on a technology venture in the realm of digitization and big data,” said Baker Hughes CEO Craig Martinhead in an Oct. 31 conference call. “With the ability to pair the reservoir knowledge and intelligent products of legacy Baker Hughes with GE’s industry- leading digital platform, we see an opportunity to unleash the power of digitization and big data that has long been anticipated in the oil and gas sector.”

The company could face antitrust concerns, which were at the heart of the failure to combine Baker Hughes and Halliburton. “The only area where we see any potential antitrust issues is in artificial lift where BHI is the number two player behind SLB and GE Oil & Gas is number four,” said Kurt Hallead, co-head of global energy research for RBC Capital Markets LLC

Combined, the two companies would have a 30% share of the artificial lift market, which could create antitrust scrutiny from the U.S. Department of Justice, Hallead said.

“The two companies also modestly overlap in wireline technology, but it is a small component of GE’s mix,” Hallead said. The merger would further consolidate major plays in the services industry. In May, Technip and FMC Technologies Inc. said they would combine in a $13 billion, all-stock deal. The GE-Baker Hughes merger is expected to close in mid-2017.