Rice Energy in mid-April revealed it offered $200 million as the stalking horse bidder on a Section 363 bankruptcy sale held by Alpha Natural Resources. If successful, Rice will add some 30,000 net acres—3,000 held by fee—of Marcellus and deep Utica rights adjacent to its current land position in prolific Greene County, Pennsylvania.

The deal adds 37% to Rice’s Marcellus drilling inventory. After backing out minerals, Rice estimates it will pay $6,600 per Marcellus acre, representing “a compelling transaction multiple compared to recent Marcellus transactions.” The deal is subject to an open auction, but subsequent bidders would have to pay a breakup fee to Rice to top the deal and with the blessing of the court.

I know, you’re thinking, “Sweet. How can I get made-in-heaven assets out of the distressed market?”

The answer is to have patience and persistence, and even then you’re still in a big pool of wannabe’s.

“I hear from potential buyers on a daily basis who are looking to acquire distressed assets,” said J.P. Hanson, head of the oil and gas group for investment bank Houlihan Lokey, which is neck deep in restructuring advisory. “The problem in this market is, for any assets with meaningful quality, it’s more likely the stakeholders are going to restructure around those assets than sell, because they don’t want to be seen as selling at the trough.”

In spite of the vast number of oil and gas companies in bankruptcy or hiring restructuring advisors to stave off filing—about a third of the whole by some estimates—relatively few desirable assets have come to market. That’s because, given good assets, the stakeholders—i.e., those who hold the debt—would rather restructure now if feasible and sell later.

“You’ll see balance sheets restructured and changes in shareholder ownership of these assets, and then there will be a wave of M&A down the road as commodity prices recover,” Hanson said.

Take Swift Energy Co., for example, currently in bankruptcy. Although it sold down a 75% interest in a small part of its portfolio, it will be able to keep its core Eagle Ford and Southern Louisiana holdings by trading 96% of its equity to the holders of $875 million in bonds, per Hanson. Plus, it got a $75 million infusion of capital from the former bondholders that also converts to equity.

To the dismay of hungry buyers, “you’re seeing exactly that kind of new money situation play out,” he said. “There is an equitization of debt, a shift of shareholders in the company, but the company still owns the assets.”

That’s not to say some distressed deals aren’t coming to market. We’ve seen BlueStone Natural Resources pick up Barnett assets from Quicksilver Resources, White Oak Resources grabbed Petrohawk’s old Gulf Coast conventional package from Milagro Oil & Gas, and White Marlin Oil & Gas added South Louisiana production from Dune Energy. Still, the Rice deal excepted, these are but a drop in the bucket, and most were mature assets. That flow may be about to change, offered Hanson.

“We’re starting to see better asset quality hit the restructuring market where companies are overlevered.” He referenced Ultra Petroleum, Templar Energy, Chaparral Energy, Mid-States Petroleum and Linn Energy. “It’s hard to say what will come to market via asset sales, but some will.”

A turn in available distressed assets may come down to simple A&D—the bid-ask spread. “We’re seeing the divergence start to come together,” he said, even for distressed sales. “We’re seeing bids on a PV-9 basis, maybe PV-12, depending on the assets,” and mostly for PDP value at current strip. Buyers are coming to the mindset that they can buy assets at low prices based on commodity price metrics instead of expecting distressed sellers to dump their price.

Quicksilver’s Barnett assets received fair market value in the current environment, he said, though they sold for well below the debt held.

Is it worth it as a buyer to play the distressed marketplace?

“I think you have to,” Hanson said. “This could end up being huge in terms of ultimate valuation.”

Nonetheless, different players and forces are at work than in a typical negotiated transaction. Creditors are sitting at the table in addition to board members, and there’s the risk of determining fair value in light of a possible accusation of fraudulent conveyance. “It can be a trickier environment,” he confessed, citing the advantage of hiring a buyside advisor.

But for those buyers who are patient, persistent and willing to kiss a lot of frogs, the reward will come.

“A buyer shouldn’t be discouraged because there hasn’t been a slew of sales to date—they’ll come. There are deals to be had. The real question is, when will we see the floodgates open?”

­We hope to see you this month at Hart Energy’s DUG Permian Basin conference in Fort Worth, May 23-25, and again next month at DUG East in Pittsburgh, June 21-23. Check out the details at HartEnergyConferences.com.

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