M&A Overdrive: Ranger Oil CEO Sees Eagle Ford Consolidation as Inevitable

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Ranger Oil Corp.’s mission to relentlessly build its Eagle Ford position went into liftoff in June, when the company closed the first half of 2022 with nine deals and 10% more acreage than it had at the start of the year.

Raw acquisition power is nothing new in the oil and gas industry. But Ranger Oil’s goal wasn’t mere conquest. President and CEO Darrin Henke said the company has tried to make every deal count.

The phrase “accretive transaction” may ring hackneyed, but Ranger has piled up $139 million in bolt-on deals while reducing debt by $50 million and paid its shareholders $49 million in buybacks and a dividend.

Ranger’s deliberate focus on the Eagle Ford, with its low water cuts and a surprisingly robust deal market despite commodity price volatility, has it on the path for a second half where it continues to evaluate deals—and possibly make a much larger acquisition splash.

Henke recently spoke with Oil and Gas Investor Senior Editor Darren Barbee for an exclusive interview with Hart Energy to discuss the company’s M&A strategy, the pipeline of A&D opportunities in the Eagle Ford Shale and some notable milestones on the horizon. [Editor’s note: This has been updated to include the full version of Henke’s conversation. An abbreviated version of this interview will appear in an upcoming issue of Oil and Gas Investor magazine.]

DARREN BARBEE: In October 2021, Penn Virginia merged with Lonestar Resources, then rebranded as Ranger Oil. How did that deal put Ranger on its current path and set the tone for the acquisitions you’ve transacted this year?

DARRIN HENKE: On the closing of the Lonestar [Resources] transaction last October we rebranded to Ranger Oil, so it was definitely a transformational acquisition for us. And when we’re looking at acquisitions, we’re thinking about the strategic fit: accretion to financial metrics. We’re looking at accretion to long-term value and also maintaining a strong balance sheet as we do those larger more strategic deals. Lonestar fell into that category and really checked all the boxes for us.

“Our opinion is we’re going to do what’s right for the shareholder. And if we get gobbled up by a larger entity, so be it.”—Darrin Henke, Ranger Oil Corp.

It was a great transaction and we were able to do it at a discount to PDP PV-10 at the time and picked up a lot of really good acreage, similar to the deals that we’ve done this year. You know, the eight bolt-ons we’ve been able to do those at a discount to PDP PV-10 and picked up 20,000 additional acres this year—from 140,000 acres to 160,000 acres. So, a material increase in acreage position, that’s probably going to add a year of drilling inventory to a very robust inventory that we already are blessed with.  

DB: As you’ve evaluated your bolt-on acquisitions this year, are you allocating any value to the upside of a particular deal? Or are your deals purely an exercise in PDP value?

DH: The eight bolt-ons that we’ve done year-to-date, we really haven’t ascribed any value to the upside. We’re able to get them done at a discount to PDP PV-10 at strip pricing at the time that we did the deals in aggregate. So, really not ascribing value when we’re making these acquisitions, you know, as far as, ‘OK, we spend $140 million, $120 million is PDP and the other $20 million is for the upside.’ We obviously look at what we think the upside could be and look at the acreage positions, et cetera, but the bolt-ons that we’ve done year-to-date, they really fit hand in glove with our position.

DB: What’s motivating the sellers?

DH: With the tight service environment that we’re seeing today, a lot of the counterparties are just having a challenge to get a rig or to get the lateral lengths with their acreage footprint that they have. Can they develop the lateral lengths that make sense in today’s environment where we have the rigs? And these bolt-ons in many cases not only improved our working interest in wells that we’ve already drilled this year or will be drilling later this year, but also allowed us to drill longer laterals as we drill off of our acreage onto the acquired acreage.

Some of the counterparties, they were nonop owners in our wells. And strategically, they’d like to sell that interest out of those wells and use that cash to develop and control their own destiny on lands that they operate. So, I think it’s just been an interesting year-to-date anyway, with a myriad of counterparties and different reasons why the deals have come together.

You know, deals don’t get done if they’re not a win-win deal. We don’t come to the table unless both counterparties are excited about the transaction. And that’s the kind of deals we’re able to put together this year. I think it’s just a unique environment.

DB: I’ve heard a lot about the number of assets that are coming to market that, ultimately, aren’t finding buyers. What’s the situation like in the Eagle Ford?

DH: Yeah, we’ve seen more. The pipeline of acquisition opportunities in the Eagle Ford has definitely accelerated this year. We’re seeing opportunities at all different sizes. You know, the blocking and tackling bolt-ons that we’ve done, a lot of midscale $100 [million] to $500 million type opportunities. And then, billion-dollar-plus type opportunities.

The way I think about it is, we want to be at the table for every acquisition opportunity that presents itself in the Eagle Ford, and we’re going to stay disciplined in our evaluation. And we look at all those I mentioned: the strategic, accretion to financial metrics, accretion to long-term value. And then, how does it impact our balance sheet?

DB: I’ve heard that a lot of M&A in 2022 has been stymied by price volatility and a resulting disconnect between buyers and sellers on price. What’s your secret in bridging that gap?

DH: That bid-ask spread, I think, moves all around as the oil price has gone up and down this year. We can’t control that. Really, all we can control is our valuation and how does it fit strategically with our assets.

We do our best to do transactions. They don’t always work out. We don’t win all of them, nor would we want to. We try to just rise above … the fray of the macro environment and just try to do really complete technical analysis and understand how the opportunity fits within our portfolio and then we bid accordingly. And yeah, you win some and you lose some but we’re going to stay disciplined in our approach and also disciplined with a very strong balance sheet. That’s very important to us.

DB: You’ve obviously been aggressive this year with acquisitions. Does Ranger have a strategic goal or a set budget for M&A?

DH: We don’t have a specific target of what we’re trying to get done from an acquisition standpoint this year. My concern around setting those specific targets is [that] we have a really high group of talented people. They’re high achievers, and when you set a target you don’t want them stretching to hit that target. You want them to stay really disciplined in their subsurface evaluation and the evaluation of the opportunity and how it fits in with your assets.

And so, there’s absolutely no targeted dollar level or growth percentage we’re trying to achieve. We want to do smart accretive deals and it just seems to be more of a pipeline of them this year.

DB: You’ve added about 10% more acreage this year to Ranger’s footprint. What’s your strategic outlook in terms of how large Ranger should be and how you see the company as a consolidator?

DH: We don’t have a specific target of a size that we’re trying to get to. We do believe that scale equals relevance in our business today. And you look at the multiples that the larger companies enjoy versus the small- and mid-caps, where we’re at. We don’t have as strong a trading multiple and Ranger’s doing all the right things.

We’re paying down debt, we’re active on the M&A front. We’re growing organically. And we have shareholder friendly initiatives where we’re buying back shares, and we’re also are paying a dividend. So, we are running the business very comparably to a lot of the larger companies. We’re just not as large. And so, we think that with additional scale, that smart accretive transactions will result in a multiples expansion.

I think some milestones that are going to be forthcoming.

DB: Such as?

DH: It’s likely next year with our activity level, the organic growth that we’re seeing, that will break 50,000 boe a day net to the company next year. We’ve had investors say that’s an important milestone for Ranger to achieve. And, and so you’ll see that happen next year. And so that, that’s an exciting milestone—but no specific, ‘we want to be a $5 billion enterprise value company in two years.’ Nothing like that.

DB: And as far as consolidation, can you envision a point where you would want to combine with another operator that’s complimentary? We’ve seen Devon Energy active in the Eagle Ford this year. Is that something you’re willing to consider?

DH: We would love to do some transactions like Lonestar [Resources] that grow Ranger materially by 50%, 75%, double the company. I think that the industry is benefiting from consolidation, the shareholder is benefiting from consolidation and that’s really what we’re here for—the benefit of our shareholder and creating more value for our shareholders.

And there’ll be a day where we may go from being the basin consolidator of choice to being consolidated into. You mentioned Devon. They announced a transaction [of Validus Energy] nearby our acreage here a few weeks ago. And that’s a logical progression, of our industry. Our opinion is we’re going to do what’s right for the shareholder. And if we get gobbled up by a larger entity, so be it.

DB: Ranger has been able to execute on multiple fronts besides M&A. Your leverage is 0.8x. You’re paying down debt. You’re paying back shareholders. How have you managed to maintain that balance while doing deals?

DH: You’re hitting on a point that I think is very unique about Ranger Oil for the size of company that we are. We can pay down debt as you’ve noticed and keep a low leverage ratio—pay down $50 million of debt in the first six months of the year. We’ve said publicly we want to run the company at 1x or less leverage ratio in this commodity price environment.

With the additional free cash flow, we’re able to grow organically, we’re able to do these M&A transactions. And we’re also able to buy back shares and pay a dividend. It really all comes back to having a very high-quality inventory with very strong margins. And that’s absolutely what we have.

DB: And that leads into why you’ve set up shop in the Eagle Ford, particularly as some other companies have diversified their portfolios?

DH: One of the things that we’re really blessed with is a very high-quality inventory and also working on the Gulf Coast in the Eagle Ford where we enjoy the number one EBITDAX margin of any publicly traded independent over the last two years. And that’s because we have low overhead.

We [also] don’t make nearly as much water in the Eagle Ford as a lot of the other shale plays do. And so, we have lower lifting costs and then we enjoy a premium marketplace and premium pricing. It’s very easy to get our products to market very inexpensive in the big picture. And then, you know, we’re getting a premium to WTI at the wellhead. After you pay for transportation, we’re getting a premium to WTI in the Eagle Ford based on MEH [Magellan East Houston] pricing primarily.

You add all those things up and it generates tremendous free cash flow. You’re hitting on a point that I, I think is very unique about Ranger Oil for the size company that we are. 

DB: How have investors responded? Are they warming up?

DH: We definitely have a demonstrated a track record of shareholder value and accretion both organically and through M&A. So just getting the message out there. People, you know, a year ago … weren’t really that excited about meeting with us. And that’s certainly changed this year. We’ve been on a Midwest road show here recently, and also to the Southeast, we went to the West Coast. So just continuing to tell the story of what differentiates Ranger from other SMID caps is the message we’re trying to get out there as well.

DB: Are there concerns about commodity prices perhaps being artificially inflated because of the war in Ukraine? And how do you respond to questions about that might happen to commodity prices?

DH: We try not to weigh in on our view of commodity pricing, because the one thing the last couple of years has taught us is what we think is going to happen and what may happen can be starkly, starkly different. We feel like oil and gas pricing and the demand for the commodities that we produce is going to continue to increase short-term. There’s a lot of recession talk. There’s a lot of macro events. An election coming up. People have a lot on their minds.

What I can assure our investors is we have a very well-thought-out hedging strategy that … has nothing to do with taking a view on what commodity prices are or might be. It is around when we invest capital, be it for drilling a well or share buybacks.

In 2020, through this risk management hedging program that we put in place, we made over $50 per barrel at the wellhead for every barrel we sold in 2020, right through COVID. Couple that with a conservative balance sheet and we’re going to win long term, we’re going to be a viable entity long term. And that’s how we think about it.

We try to stagger the length of our service contracts, such that if we saw a material pullback in commodity prices, like we did back in 2020, if need be, we can pull back on the activity and then turn around and get back into it when it makes sense. And that’s exactly what we did in 2020. We went from three rigs to no rigs and then waited four or five months and picked a couple rigs back up and we’ve been running them consistently since.

DB: How has inflation affected Ranger’s business?

DH: Inflation has been material across the board in our industry and broader, no question about it. That’s supply chain issues, bottlenecks. You know, first and foremost, having really high-quality service partners where we don’t lose sleep at night, wondering will I have frack sand? Will my frack crew show up? We hear that a lot from other companies that the supply chain doesn’t even show up, no less what they’re actually charging. And inflation’s been certainly been material.

DB: How has that directly affected Ranger?

DH: We’ve really focused on being a more efficient operator. Every day we think about continuous improvement. How do we do better tomorrow?

We are pumping in higher frac rates, which allows us to lengthen our stages. So, we’re reducing the frac stages in each well, reducing the number of interventions in the well, as far as setting frac plugs, perforating, those kinds of things. 

We made a decision a year ago to increase the size of our production casing from five-and-a-half inch was our standard at Ranger Oil. We’ve gone up to six-inch casing and we’re just starting—it took a year for the supply chain to make that adjustment. We’re just starting to run six-inch pipe in our wells, but that’s going to allow us to pump at 20% higher frac rates, which allows us to reduce our stage count by 20%. We have been able to manage inflation and the supply chain in our margins as commodity prices have increased. Even though there’s a higher cost of doing business, our margins have still expanded, more than we’ve seen an increase in the cost of doing business.

DB: How has your company responded to ESG concerns?

DH: With buying Lone Star last year, and then the acquisitions that we’ve done this year, we're focusing on bringing those new assets up to Ranger’s internal standards. We’re also working on an inaugural sustainability report this year that will come out between now and the end of the year. And from a social and governance standpoint, Ranger Oil has a statistic that is really unbelievable if you step back and think about it. Four of our six officers that run our company day-to-day are women.

We’re very proud of that and the contributions they make to the bottom line each and every day.

The ‘E’, the environmental aspect of emissions is really what is all about in our business and trying to minimize those emissions. I want to sell that gas. I don’t want to flare it. I get paid for it if it goes down the sales line. So, we work hard to plan our work and get the pipeline laid before we ever start our completions.

DB: And to return to acquisitions. You had a busy first-half 2022. Do you anticipate being as aggressive in evaluating additional bolt-ons?

DH: Absolutely. We can’t promise that there’ll be more deals getting done. We would love that to be the case. We’re focused on kind of the $100 million to $500 million opportunities. And then we’re focused on the large, strategic opportunities as well. You’ve probably seen where Chesapeake [Energy]’s talking about bringing assets to the marketplace later this year in the Eagle Ford. We hear some good-size companies are planning to come to the marketplace early this year. So, we hope that it’s a very active second half of the year as well.

DB: And would you foresee using equity as part of the consideration for a larger acquisition?

DH: For the larger deals, it would really be a requirement. As the deals get larger, to do it all in cash is going to start to leverage [Ranger] back up. We’ve said publicly while we would take on additional leverage for the right accretive strategic opportunity, we don’t want that leverage to go beyond 1.5x leverage [as with the Lonestar Resources deal]. So, for larger transactions depending upon how much cash flow they’re generating, a deal’s likely going to be using equity and cash, both, to make the transaction happen.