The days of buying a nice shale parcel, sitting on it until it was proved up a bit and unloading it for a fat profit are largely over, speakers said at DUG Midcontinent in Tulsa.
The land grab is done, said Doug Reynolds, head, U.S., Scotia Waterous, Scotiabank Global Banking and Markets. Instead, operators’ focus has turned to big production and putting the drill bit in the ground, he said.
“We think the buyer universe has changed because of this big change in organic growth,” Reynolds said. “You’ve seen the companies like Range Resources have 20% to 25% organic growth per year that’s mostly coming from the drill bit. So their need for the land grab is largely over.”
Transactions are still happening. In 2012, a record $80 billion changed hands in the U.S. And the Midcontinent, in particular, has shaped up to be a hot spot for billions in deals, though many companies are keeping a firm grip on their holdings. But companies are turning in remarkable success built through a big bank roll, solid acreage holdings and expertise in what they do. They simply have as much land as they can deal with, for now.
“They’re putting all three of these things together, and they‘re making some serious dough,” Reynolds said. “And we think they’re going to continue to acquire additional assets where they can and where they can deploy that money attractively.” Still, many deals are simply failing to materialize, including large public companies, eight of which could not get a bid they wanted for what they were selling, Reynolds said. In the U.S., 40% of all marketed deals failed in 2012.
“Frankly there are a lot of guys who continue to struggle,” he said. “That used to be in this industry that maybe you could buy some good acreage hang on to it, get your neighbors to drill it up and flip it.”
But when buyers see such companies, which are unable to drill themselves, they’re not paying premium because they know the alternative is not an attractive one, Reynolds said.
Daniel Weingeist, managing partner, Kayne Anderson Energy Funds, said that companies that once might have purchased such large acreage simply don’t see the need to do so any more.
A company with a $2 billion market cap and $4 billion in capital expenditures might have 200,000 or 300,000 acres to develop in one or more plays. Drilling that amount of acreage is expensive.
“The amount to capitalize their acreage far exceeds their market cap,” he said, noting that even joint ventures appear to have slowed down.
Still, the Midcontinent is different. It has some of the best economics, broadly, in the U.S.
“That’s obviously going to drive money into this part of the world,” Reynolds said. In the U.S. market, the Midcontinent makes up to 15% in transactional activity. From 2011-12, the area attracted as much as $9 billion, a much higher level historically,” Reynolds said.
Since 2010, 40 deals have been announced with a transaction value of $19.1 billion. Already producing assets grabbed 51% of that figure, with undeveloped and mixed acreage making up the rest.
“Guys like this stuff—there’s not enough of it. They tend to hold on to it,” Reynolds said. “It doesn’t tend to transact. It tends to be pseudo crown jewel stuff within most companies and owners.”
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