After $900 Million Acquisition, Validus Sees Potential Eagle Ford Consolidation

FORT WORTH, Texas—A&D activity is likely to tick up in the Eagle Ford during the next couple of years and Validus Energy may well be one of the buyers, said the company’s CFO, Cameron Brown.

Denver-based Validus, with roughly $1 billion of capital commitments available for deals, “would love to continue to consolidate the basin,” Brown said at Hart Energy’s DUG Permian Basin and Eagle Ford Conference and Exhibition last month.

In March 2021, Validus Energy agreed to purchase Ovintiv’s Eagle Ford assets for $880 million. Ovintiv, formerly known as Encana Corp., purchased the assets in 2014 for $3.1 billion. Validus is backed by Pontem Energy Capital Management LLC, which shares board members including Brown.

“We’re going to continue to see increases in activity over the course of the next couple of years on the A&D side,” Brown said. “The basin is still in spite of being pretty tightly held by a few public folks. It’s still fairly fragmented in terms of what I would’ve historically called smaller operators.”

“The ability to buy barrels in the ground and convert those resources to reserves, I think arguably there has never been a more attractive period than where we are today.”—Cameron Brown, co-founder, executive vice president and CFO, Validus Energy

However, the recent run-up in commodity prices also makes it more likely that sellers will want “pretty big checks.”

“But I do think that it’s inevitable, too,” Brown said. “That’s kind of the direction we have, especially as we continue to see the pressures … over the ability to execute a program where if you don’t have scale, if you’re not running a couple rigs, if you don’t have a dedicated frack crew, it’s all the more difficult to actually get those barrel online and be able to experience the commodity price we’re at now.”

Brown said the A&D market is slowly returning to the notion of spending money for “barrels in the ground.” He noted that a year ago, everyone wanted to purchase PDP-only assets at a significant enough discount to generate an attractive free cash flow yield.

“And then you hope that you have development potential on top of that,” Brown said.

However, PDP offers a fairly low return proposition, Brown said.

“If you’re buying … PDP for PV-10, maybe you apply some leverage to it, but you’re still only getting to maybe a high-teens return, which in this business is still tough to underwrite” for most capital providers.

As the commodity prices have risen, Brown said “What we’ve seen is definitely a shift more towards folks being interested in development inventory, because that is obviously where you generate your returns.

“The ability to buy barrels in the ground and convert those resources to reserves, I think arguably there has never been a more attractive period than where we are today.”

E&Ps that acquire at the right price have the potential to generate “an incredible margin on converting a location” bought at a PV-25 valuation and “converting it to PV-10 and seeing commodity price uplift over that period,” he said. “I think folks are heading the right direction, which is that they realize they need development inventory to generate returns.”

That thinking partly led to Validus’ purchase of Ovinitiv’s asset. At the time the deal was announced, Cowen analysts priced Ovintiv’s PDP assets at $575 million, with the remaining $305 million in value ascribed to undeveloped locations.

Validus has about 400 locations as well as 200 sites where it sees potential in refracturing wellbores.

“We have a very development-focused team,” Brown said. “We have a lot of capital to deploy. We’ve got another billion on our capital commitment. And so, we wanted the ability to invest capital in the ground.”

Pontem Energy was formed following the May 2020 sale of Felix Energy LLC to WPX Energy Inc. for $2.5 billion. The Felix Energy team, led by President and CEO Skye Callantine, previously built and sold about $7 billion in assets, including upstream projects, midstream assets and mineral interests. Callentine previously ran drilling operations for Chesapeake Energy in the Eagle Ford.

The pandemic initially derailed the team’s E&P prospects and Pontem worked primarily as an alternative capital provider for upstream oil and gas companies.

“We were spending a lot of our time looking at ways that we could get access to quality assets,” Brown said. “At the time the A&D market was obviously dead. Oil was -$37 at one point.”

As prices recovered, the company pivoted to acquiring an asset.

Brown said the company looked at probably 20 upstream operated assets ranging from $500 million to more than $1 billion in assets.

“We got close on a couple things, but we’re ultimately successful on buying the Ovinitiv position,” he said, adding that the deal was made during a time when buyers had shied away from making “big, splashy acquisitions.”

“We were just fortunate that at that moment in time, there was a unique situation where Ovinitiv needed to sell that business to generate cash,” Brown said.

Brown said the Eagle Ford, in particular, has been consolidated in a moderate way over the course of the past five to eight years.

“Because of that, it had kind of fallen off folks’ radar to a certain degree in terms of places where people wanted to make big acquisitions and kind of generate returns from the drill bit.”

With the Permian Basin commanding consistently high valuations, the Eagle Ford appears poised to make some noise.