Oil and Gas Investor A&D Trends: Fourth-quarter Shots

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A precision strike in November created a large debris field in orbit around the planet.

This is not a reference to the reckless weapons test by the Russian Federation that shot down a decommissioned satellite (putting its own astronauts in potential danger) but of course recent comments by Occidental CEO Vicki Hollub.

Hollub’s was asked in mid-November about President Joe Biden’s recent pleas to OPEC+ for an oil production increase. Asked by CNBC about whether Biden had made a misstep reaching out to the cartel instead of U.S. producers, Hollub said she personally would rather have made a local call than dialing long distance. We’ll pause here and let the under 30 crowd Google “long distance phone calls.”

“I think first you stay home, you ask your friends and you ask your neighbors to do it. And then if we can’t do it, you call some other countries,” CNBC reported Hollub as saying at an energy forum … in Abu Dhabi, the capital of the United Arab Emirates.

Speaking of rockets, the fourth quarter shot off with a couple of large deals, including Southwestern Energy’s purchase of GEP Haynesville LLC for $1.85 billion. Combined with Southwestern’s earlier purchase of Indigo Natural Resources, Southwestern will have spent a combined $4.55 billion in Louisiana when the GEP deal closes.

If there’s a race to consolidate in the Haynesville, Southwestern seems determined to win, as in, it has already won, discussion over.

Southwestern CEO Bill Way said Southwestern’s GEP acquisition has now poised it to become the largest producer in the Haynesville. The company’s base in Appalachia remains a juggernaut of production with 3 billion cubic feet equivalent (Bcfe). GEP would bump up Haynesville production to 1.7 Bcfe from 1 Bcfe.

“This strategic move positions Southwestern as the largest producer in the Haynesville and enhances our leading presence in the top two premier natural gas basins in the U.S.,” Way said in a news release.

Keeping to the rocketry theme, there seems to be some confusion about trajectory of Continental Resources Inc.’s recent transactions.

The longtime Bakken and Oklahoma producer has made two large acquisitions this year. The first put it in the Powder River Basin with a relatively low-priced $215 million acquisition of Samson Resources II LLC. Continental said the deal added 130,000 net acres in Wyoming. It was an outlier acquisition or so it appeared at the time.

On Nov. 3, however, Continental launched the equivalent of an Atlas V rocket at the Permian Basin. The deal was different, perhaps too different for some analysts’ tastes.

Continental’s Atlas V sized deal for the Permian is different—in fact perhaps too different for some analysts’ tastes. In part, this may be because Continental agreed to buy Pioneer Natural Resources Co.’ Delaware Basin assets for $3.25 billion in cash.

This deal firmly establishes or re-establishes a few truisms about the Permian. The first is that when Pioneer CEO Scott Sheffield says he doesn’t really like the Delaware basin, he really, really means it.

Recall that Pioneer acquired the Delaware acreage in its merger with Parsley Energy Inc.—a combination that closed in January for at a cost of roughly $7 billion.

But Continental’s move south also had some analysts concerned that it might affect hurt the company’s ability to return free cash flow to investors.

“Needless to say, it caught us (and a majority of investors) by surprise,” Raymond James analyst John Freeman wrote of the deal.

The acquisition includes 92,000 net acres in the southern Delaware, with production of 55,000 boe/d, about 70% of which is oil.

“Most importantly, however, the acquisition is accretive to CLR paying a 3.6x EBITDA multiple (about 17% FCF yield), below the company’s current 4.3x multiple,” Freeman wrote.

The deal also confused the strategic intent of Continental for Gabriele Sorbara, analyst at Siebert Williams Shank.

More concerning for Sorbara, Continental may be ramping up for another $375 million in various property acquisitions to “increase its position in multiple strategic plays.”

“The uncertainty around its M&A strategy has us concerned and is likely to weigh on the stock performance, especially given the current environment where investors are seeking discipline and cash returns.”

Indeed, the company’s stock initially slid by about 6%.

On the other hand, Tudor, Pickering, Holt & Co. noted that Continental increased its quarterly base dividend and has more than $600 million remaining for share buybacks to assuage any doubters. Also, improvement in oil prices could see the Delaware acreage value rise closer to $4 billion.

Call this deal a careful gamble.