The Midcontinent region of the US has always played a key role in the domestic supply of US crude oil and natural gas.

Oklahoma alone contributes gross production of 278,000 barrels of oil equivalent per day, almost 6% of total Lower 48 gross production, according to the Energy Information Agency. And much like other regions across the US, the Midcon's prominence has grown over the past few years as horizontal drilling has given birth to a host of new horizontal redevelopment opportunities, including the Granite Wash, Mississippi Lime, Cleveland, Woodford, Scoop (South Central Oklahoma Oil Province) and Stack (in Kingfisher County, Oklahoma) plays, among others.

The rise and subsequent de-risking of these horizontal plays combined with a changing A&D landscape has led to a resurgence in Midcon deal activity, despite the broader A&D market experiencing a five-year low in 2013.

The Midcontinent's contribution to overall A&D activity registered a record year in 2013 as 17 announced transactions accounted for approximately $5 billion in total value, representing 14% and 12% of total US transactions, respectively.Much of this activity has focused within the Anadarko Basin as companies like Midstates Petroleum Corp., Jones Energy, Newfield Exploration, EnerVest Ltd. and Templar Energy added sizeable, liquids-rich positions.

Anadarko Basin

The heightened levels of deal activity have been fueled largely by overarching public and private market dynamics that are bringing sellers and buyers together. Specifically, public markets are rewarding companies with focused, growth-driven, liquids-rich portfolios while private companies are seeking to secure more developed assets, compared to the largely undeveloped acreage deals that had been prevalent over the past few years.

With few exceptions, there were two types of sellers in 2013: private-equity backed and public companies. Sellers in the former category like Primary Natural Resources III (backed by Quantum Energy Partners) include single-asset companies that had sufficiently derisked their positions. Sellers in the latter category included companies like Cabot, SM Energy and Laredo Petroleum that were executing a shrink-to-grow strategy; shrinking in noncore basins and using the sales proceeds to grow in core plays like the Marcellus, Eagle Ford, Bakken and Permian.

The demand side of the equation was strong and diverse as C-Corps, master limited partnerships (MLPs) and private equity all successfully bought assets in 2013. This renewed buyer interest can largely be attributed to the fact that the Anadarko Basin offers many of the primary attributes buyers are seeking in assets today:

Base production and cash flow. Proved developed reserves averaged 57% of 1P reserves for transactions since 2012, allowing buyers to boost equity returns through leverage and fund future capital requirements through existing cash flow.

Operational efficiencies. Operators continue to maximize economics through pad drilling, increased well spacing, and optimized completion design. As a result, drilling times in plays like the Granite Wash have come down by approximately 40% since 2010.

Scalability. Transactions averaged 85,000 net acres per deal, providing the size and scope necessary to attract large-scale buyers looking to develop new core areas.

Acreage largely held by production. Legacy vertical and recent horizontal developments hold significant swaths of acreage, allowing operators to focus on asset optimization rather than lease preservation/delineation.

Stacked pay.The Midcon enjoys active vertical and horizontal development up and down the stratigraphic column, allowing buyers to aggressively value near-term, proven developments while retaining tremendous upside potential via the development of additional zones and strengthening commodity pricing. The potential strengthening of gas prices in particular is contributing to demand as contrarian buyers seek to lock in a relatively inexpensive long-term gas option.

As an example, Granite Wash players have responded to low natural gas prices by developing the shallower, liquids-rich Missourian intervals and leaving the deeper, gassier, Desmoinesian-age Marmaton and Atoka washes for future development.

Looking ahead

The Midcon is expected to continue being one of the more active regions in the US, both from a development and A&D perspective. As a testament, QEP Resources announced its intentions to kick off the new year by pursuing the sale of its Granite Wash and Cana Woodford developments. The planned divestment is both characteristic of deals done in 2013 and a harbinger of transactions to come.

Daniel Rojo, vice president, A&D, and Derek Detring, vice president, A&D, Wells Fargo Securities

For details on assets on the market, see A-Dcenter.com.

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