Taking Stock

The more detailed a Permian Basin acreage map is, the more it resembles a Jackson Pollock painting rendered on a Lite-Brite.

A zoom-in on the Delaware Basin finds more than a dozen E&Ps gerrymandered together, some like Felix Energy II LLC hugging the eastern edge of the basin.

Felix Energy illustrates its acreage map in yellow, which is clear enough, but it’s nearest 12 neighbors require stretching the color palette from barn red to French lime. The same goes for Abraxas Petroleum Corp.’s position straddling the Winkler and Ward county lines in Texas—where 17 other operators, including Felix, tag positions by color, patterns and pinkish polka dots. (Sorry, Oasis Petroleum, that’s you.)

While 2018 M&A activity has brought about a little more uniformity to the Permian, it’s still crisscrossed by a jumble of operators. Still, all signs point toward consolidation continuing in 2019.

Not by coincidence, Felix is on the market, a source confirmed to Investor, with a deal expected sooner rather than later. Abraxas is doing prep work before it also begins a sale process. Endeavor Energy Resources LP is also reportedly testing the market.

The potential problem is that cash in the Permian is as scarce as a Target store west of U.S. 385. Companies such as Diamondback Energy Inc. cannibalized billions in stock for deals—and little or no cash.

Will private companies such as Felix and Endeavor, both created with private-equity funds, take most of their exit in share value alone?

Public independent E&Ps aren’t the only game in town. BP Plc closed its $10.5-billion purchase of BHP Billiton Ltd.’s Delaware, Eagle Ford and Haynesville assets on Oct. 31. Royal Dutch Shell Plc., ExxonMobil Corp. and Chevron Corp. also hold large positions in the play.

But the motivation for scale and inventory is vested with public independents—a need that continues to set deals off across the Permian like time-delayed charges. In the Lower 48, third-quarter upstream asset deals tallied $18.9 billion, according to Raymond James in its quarterly A&D report in November.

“Large-scale consolidation is becoming more and more of a driving force of M&A today,” according to the report. The continued focus on capital discipline will continue to act as a “significant tailwind for A&D in the U.S.”

The fourth quarter, through Nov. 9, has continued merger activity in the Permian and beyond. In the Midcontinent and Eagle Ford, large-scale mergers have topped $14 billion. However, a deal’s composition varies greatly depending on the buyer.

Mergers and acquisitions between public companies have lately been heavy on stock and light on cash, including Encana Corp. and Newfield Exploration Co. (all-stock), Denbury Resources Inc. and Penn Virginia Corp. (24% cash), and Chesapeake Energy Corp. and WildHorse Resource Development Corp. (10% cash).

Compare that to the Permian, where two deals between public and private companies were cash-heavy. Diamondback’s $1.2-billion offer for Ajax Resources LLC in August consisted of about 72% cash. Earthstone Energy Inc.’s October deal to buy Sabalo Holdings LLC for $950 million includes 68% cash.

Some of the private companies for sale in the Permian are expected to command even high values.

In the northern Midland, Endeavor Energy’s 300,000 net acres could be worth more than $10 billion. Felix Energy’s coveted 60,000 net acres in the Delaware core could be worth $3.5 billion, some reports have suggested. As of August, Skye A. Callantine, president and CEO, told an audience at EnerCom’s The Oil & Gas Conference that the company was operating six rigs with average production of 30,000 barrels of oil equivalent per day.

In addition to holding an average 95% working interest, most of Felix’s locations support 2-mile lateral drilling. The company has also built extensive infrastructure on its acreage, just as it did in the Stack prior to selling to Devon Energy Corp. in January 2016 for $1.9 billion.

If a public E&P bought Felix and percentages hold, that could suggest a value of $2.5 billion (at 70% cash), with the change paid in common stock.

Problem is, where E&Ps see colorful M&Ms laid out on the Permian table, shareholders just see red. And cash, to paraphrase a slogan, melts in the market, not in your hands.