U.S. oil and gas deal makers came together at the Ritz Carlton Hotel in Dallas in early September at Hart Energy's 13th annual iteration of the A&D Strategies and Opportunities conference and workshop. The brain trust in the room represented tens of billions of dollars in upstream energy transactions in recent years in deals big and small. The following is a sampling of information flowing out of the two days.

Aubrey McClendon is perhaps the most prominent deal maker in the country over the past year, amassing $13 billion in private capital and buying up positions in the Permian, Woodford, Utica and Marcellus. As the author of the multibillion-dollar international joint venture, the former Chesapeake Energy Corp. (NYSE: CHK) CEO proffered to attendees that “international capital has been replaced by private-equity capital,” noting that he’s raised on average $1.6 million for every hour he’s been separated from Chesapeake, a forced exit.

His new model, under the moniker American Energy Partners, is individual entities with single-basin strategies--and separate private investor backers. “The market is clear that it wants to invest in companies built around a particular play or strategy,” he said, and “we have a pocket for every potential seller.”

Under AEP, McClendon has amassed 630,000 net acres and 82,000 barrels of oil equivalent (boe) since April 2013. “We’re in growth mode,” he said, inviting anyone wanting to sell or join up to meet him in the lobby afterward.

EnerVest Ltd.’s John Walker is no slouch either when it comes to buying and selling assets. EnerVest feeds on a steady diet of deals, some $3 billion in value for both acquisitions and divestitures (A&D) in 2013. “We’re pretty active in the market,” he said.

Within the past year, EnerVest sold its premier Permian Basin assets to QEP Resources Inc. (NYSE: QEP) for $950 million. Why sell out of oil? Walker explained, “When we saw everyone running to oil basins, a 10-watt light bulb went off in my head: Maybe we should sell our best asset.” And while he believes EnerVest received a liquids premium for the piece, “I feel it will be worth $3 billion when drilled.”

Conversely, EnerVest subsequently acquired HighMount E&P LLC for an undisclosed amount, with a portfolio of mostly gassy assets in the Permian and Midcontinent. Why buy gas? “When everyone is zigging, we’re going to zag,” he said.

When seeking assets, he advised: “Building concentrations is the only way to maximize efficiencies.”

{C}

Shale and tight oil and gas assets were the dominant targets of foreign investments over the past six years, accounting for 73% of total upstream deal value, according to Ernst & Young research, but that international capital infusion might have dried up. Far right: based on drilling 500 to 1,500 wells per year, Jefferies LLC estimates the top 12 U.S. operators are holding between 15 and 50 years of drilling inventory--and are likely ripe for divestiture.

The deal makers

Abraxas Petroleum Corp. (NASDAQ: AXAS) president and CEO Bob Watson wove a tale of how his small exploration and production (E&P) company survived the financial crisis through A&D. The company sold out of nine states in 20 transactions, slicing debt as it went, and cored up its portfolio in the Rockies, West Texas and the Eagle Ford.

One tenet Abraxas adheres to is to maintain a max five-year inventory. “Twenty to 30 years worth of locations don’t have a lot of value today and don’t affect share price,” he said. The model is to acquire 20% of drilling inventory per year at the same pace that drilling consumes inventory.

How to maintain that steady inbound deal flow? Watson sees opportunity in coming in behind larger companies with stranded leases not getting attention.

Larger companies bloated with drilling locations “plays right into our hands,” he said. “We’re able to pick and choose areas we want to go to when looking for potential opportunities. We pay the going rate for it, but we develop it immediately, thus capturing that rate of return, rather than it sitting in their pocket for the next 20 years generating no return.”

As a small company, “we feel like we’re more able to generate a maximum rate of return out of the shale plays because our guys have the capability of tweaking things on the fly. People think it’s a blanket accumulation, but wells 350 feet apart can be completely different and require different completion techniques.”

In the Bakken, where the good acreage “is pretty much held,” but where drilling units tend to be fractionated, Abraxas often swaps acreage. “We have pretty good swap currency,” Watson said. “We’ve kept various assets for that reason. For a small company to be able to swap interests into another operated [drilling unit] to get another 15 wells, that’s a year and a half of inventory.”

That’s the new way for a small company to make it, he said. “You don’t need all the capital if you’ve got good assets.”

Brad Marvin, vice president of business development for FourPoint Energy, said unprecedented activism and consolidation strategies at independent companies have created abundant opportunities in the Granite Wash play. “It’s a perfect storm of opportunity,” he said.

FourPoint is the reincarnation of the Cordillera Energy Partners management team, which sold its Western Anadarko Basin assets to Apache Corp. (NYSE: APA) a couple of years back for $3 billion.

Now the boys are back in the basin, which Marvin touts as a world-class resource with more than 20 stacked pay zones. FourPoint has $1.25 billion in capital availability, “which gives us the ability to quickly seize investment opportunities with scale.”

A joint venture with EnerVest in 14 counties “essentially doubles our firepower to go out and conquer” the Western Anadarko, leveraging each company’s strengths. FourPoint has a geological database covering 15,000 square miles, and EnerVest deploys what he describes as “an A&D SEAL team.”

FourPoint’s A&D strategy is not to simply “buy things cheap,” he said, but conversely he is wary of overpaying for assets. “There is a lot of optimistic capital out there.” Rather, he uses knowledge of the basin “to see value that others don’t.”

Its recent $275 million acquisition of QEP Resources’ assets is a prime example, at metrics “competitive with the rest of the basin.” For an asset that fell to the bottom of QEP’s portfolio, “We saw how that would fit and what it would become in the next three to four years.”

Later, QEP revealed its liquids-focused A&D agenda, and just how competitive the marketplace for these assets can be.

“As we move toward oil, it’s getting tougher and tougher,” said QEP senior vice president of business development, Austin Murr. “It’s getting so thin, that execution is the key.”

Supporting that idea, John Kelly, president of privately held Cantera Energy LLC, said with a straight face, “Be the highest bidder” when making offers. “A lot of sellers like that. Whoever pays the most wins in most cases.”

Nonetheless, he couches the seemingly obvious with, “The trick is how to value the asset more than the next guy and still offer value to your investors. Know your strategy before you buy. Execution of the plan [after acquisition] is critical.”

Money men

Capital providers had a say as well. EnCap Investments LP partner Jason McMahon said superior risk-adjusted rates of return have existed “for a long time. That’s why there’s so much money coming into this space. In the face of this flood of capital, we’re still seeing great opportunities on the ground. We’re seeing the opportunity set grow with the capital.”

And EnCap has no interest in small thinking. “We’re trying to build teams that can build $1 billion enterprises,” he said.

KeyBanc Capital Markets director of E&P David Deckelbaum told the audience that the industry is in a sweet spot. “We’re on track for the most active capital market ever,” he said, and public companies that don’t issue equity “are only hurting themselves.”

Public companies are currently paying some 10% more than their private counterparts on average for deals, he noted, but all too often are not getting enough bang for their buck.

“If I had a boatload of money, I’d pay as much as I could for quality acreage,” said Deckelbaum. “A lot of E&Ps go wrong by priding themselves on getting into a play on the cheap. Investors don’t care what you pay for acreage, but you have to show them superiority of growth.”

Comments