The U.S. energy sector by and large continues to operate under a mandate of financial discipline, but that hasn’t stopped small players from finding and making deals, panelists said during Hart Energy’s A&D Strategies and Opportunities Conference in Dallas, Texas.

“A lot of capital has left the space and that has certainly had an impact on valuations in our space. That's just made the industry a lot more disciplined from a financial standpoint,” said Brad Nelson, Stephens Inc. managing director, head of A&D.

The IPO market, Nelson said, isn’t as wide open as it used to be, with market welcoming only two to four working IPOs per year.

Jace Graham, CEO and founder of Rising Phoenix Royalties, said his company has been picking up assets all across the U.S. and in the last 18 months. The company has started to find good opportunities in Tier 2 and Tier 3 Permian Basin acreage—and at price points that work.

Graham said that everything his company surveyed in the Permian “had some form of sizzle to it.”

“We’re talking to motivated sellers that are interested in entertaining offers and selling some assets,” Graham said during the panel. “Our deal pipeline is really healthy right now, in fact, we have more deals than capital. So [we’re] looking for partners always.”

For Silver Cross Energy President and Co-founder Leslie Armentrout, the best place to get a deal done is with existing contacts. The company has shopped for conventional assets, although generating capital can be tricky because not every can “handle conventional oil and gas. It just doesn’t spin off as much cash.”

“First things first, everything is always for sale at the right price,” Armentrout added. “We're looking to buy assets right now.”

Silver Cross, a private family office, is aiming to reach production of about 1,000 bbl/d. Right now the company’s production averages about 200 bbl/d.

Armentrout said her company was looking for assets with 200 bbl/d of production and within one county if possible. She suggested that Silver Cross’ next deal would probably be for more than 500 bbl/d, with 65% to 80% of the production hedged.

PDP and PV valuation

Armentrout said her company was mainly interested in proved developed producing, or PDP, assets that aren’t spread out.

“We all know that when you're picking up vertical wellbores in the Permian basin, you're going to pick up some liability,” she said. “I'm looking for things that the liability is not in excess of the PDP value of the asset. There's got to be some upside somewhere.”

From a PDP perspective, Armentrout said what Silver Cross was willing to pay varied in, for instance, Texas and New Mexico.

Armentrout said her company was looking for returns between 25% to 30%. Finding opportunities, however, takes some doing, depending on where she’s shopping for assets.

Armentrout said that in Texas, higher values are associated with the lower risk profile for operating in the state.  

“I'll pay PV-15 or PV-20 as long as I get more than just the one wellbore,” Armentrout said. “We're looking for things that have a little bit of meat on the bone.”

But for deals in New Mexico, PV-15 or PV-20 isn’t realistic because of challenges operating in the state.

“If you're picking up assets in New Mexico and they're kind of spread out a little bit, PV-15 or PV-20 is not necessarily realistic because as an operator it’s immeasurably harder [to operate] than it is in Texas. So, I'm not going to pay PV-20 in New Mexico for conventional wells. I'll pay PV-30 or PV-40.”

Graham said some buyers tend to focus on a basin specific or a county and they underwrite “the whole county and get the engineering and the geological studies and all that kind of stuff.”

Rising Phoenix’s approach is different. “We kind of go the other direction where we're kind of casting a broad map maybe over the Delaware, the Midland Basin.”

In terms of deals, Graham said that each basin had its own story and had to be valued based on its location or zip code.

“You just have to get very local, figure out where the market is in that particular zip code and go through the same math, which is how you think about allocating value to production upside assessing risk, all those things,” Graham said.

On bid-ask spreads, Graham said that they had narrowed on oily deals and that on the gassy deals depending on “the zip code.”

“There's a couple of zip codes where the bid-ask spread isn't that far off. So, thinking like the Haynesville, East Texas, the Marcellus. In some of those areas, the bid-ask spread is actually not that wide. We've closed probably seven to eight gassy deals in the last 15 [months] to 20 months.”

“I do think the buyer universe is leaning into the LNG infrastructure… the AI build out. When that's really going to have an impact on prices, who knows?” Graham said. “But I do think that it's making the bid-ask spreads for gassy deals compress a little bit.”

Comments