Private Equity Money Washes Over Permian

Private equity has time—and money—on its side.
As the horizon for realizing gains on investments expands, private equity funds are continuing to take bets on oil and gas. On May 24 alone, equity firms raised or spent $1 billion earmarked for oil and gas-related companies.
Energy- and resources-focused global private equity firm Denham Capital funded Tall City Exploration II LLC with a $300 million equity commitment.
The last time around, Tall City hit pay dirt for Denham. In November 2014 and November 2015, Tall City Exploration LLC made separate deals to sell Midland Basin leasehold for $1.5 billion.
Mike Marziani, Tall City CFO and vice president, told Oil and Gas Investor that the company’s second iteration will look for the most attractive acquisition opportunities in the Midland and Delaware basins.
The company is “relatively agnostic between the two, as long as the opportunity provides requisite well performance and running room to provide returns to our stakeholders,” he said. “We hope to achieve similar success in TCE II as we accomplished in TCE I.”
Still, the company has a practical view of how competitive the Permian Basin is for deals, and it is factoring in how it will eventually exit the investment.
“We believe we have structured our deal with Denham Capital to properly align our interests in today’s strategic environment and allow all stakeholders to achieve success if capital is deployed prudently,” he said.
Permian values have held more or less steady since the downturn as the stacked acreage potential offers significant upside.
But Tall City won’t be targeting a specific asset type, area or even subsurface horizon. It’s counting on an inside track to sellers who know its reputation for excellence.
Tall City’s team and its longstanding presence in Midland, Texas, may open doors to opportunities otherwise unavailable or at least not broadly marketed.
“Additionally, with our capital secured from Denham, we will be able to provide deal certainty and close expeditiously with any potential seller,” Marziani said.
As for other potential buyers in the Permian, contigious acreage is always a goal, but at this point may be difficult “if not impossible” in the core Permian areas of operation, he said.
“We are not averse to building an asset position piecemeal, as long as there is enough scale to deploy drilling dollars efficiently through proper lateral lengths,” Marziani said, adding that in most areas that would mean one-and-a-half to two-mile laterals.
Tall City II will be led by president and CEO Michael Oestmann.
“Coming on the heels of last year’s success in a down market, we know that there will be very high expectations,” he said. “However, we are extremely confident in our strategy and our team and feel that this group’s on-the-ground experience and local relationships in the Permian will result in the creation of another successful E&P operation.”
Private equity firm Energy Spectrum Capital also announced investments recently. It is committing $100 million to BlueJack Energy Solutions LLC through its Energy Spectrum Partners VII LP fund.
BlueJack president and CEO Ted Lopez told Hart Energy that the funds will be used to support greenfield development and the acquisition of existing infrastructure.
“We are in a strong financial position and have the ability to rapidly source additional capital depending on specific project needs,” he said. “The funds will also support current project budgets and provide runway for moving quickly on attractive opportunities."
BlueJack provides oil and gas producers with a full suite of waste-stream management solutions including saltwater transmission and disposal, solids processing and disposal and wastewater recycling. BlueJack’s initial operations are focused in the Permian Basin and the Marcellus and Utica shale plays.
BlueJack has signed multiple contracts with Laredo Petroleum Inc. for water disposal services in the Permian.
“Despite the dramatic shift in the commodities price environment, the opportunity for large-scale development of waste-stream management and supply-side infrastructure continues to grow and expand,” Lopez said. “ Producers are focusing on plays with the best economics and are seeking relationships with reliable partners that have specific expertise and the ability to help them optimize operations and reduce lease operating costs."

Devon Energy Divests $1 Billion In Upstream; Pipeline Next

Purely from an A&D perspective, Devon Energy Corp.’s tradecraft may have few rivals.
On June 6, Devon said it had three deals inked to sell noncore upstream assets in East Texas and the Anadarko Basin and an overriding royalty interest in the northern Midland Basin for $1 billion.
The buyers were not disclosed. The deals are not expected to change the company’s capex or production, but once again, they seem to put Devon in the right place at the right time.
“Combined with other recent asset sales, we have now announced $1.3 billion of gas-focused upstream divestitures. As we’ve said previously, proceeds from these tax-efficient transactions will be utilized to further strengthen our investment-grade financial position,” said Dave Hager, president and CEO. “With oil prices having moved in our favor throughout the sales process, we are encouraged by the interest and progress in marketing our remaining noncore oil assets in the Midland Basin and Access Pipeline in Canada.”
Devon said it is in advanced negotiations to sell its 50% interest in the Access line with an announcement coming in the next several weeks.

The company is also marketing working interests in about 15,000 net undeveloped acres in Martin County, Texas, in the Midland Basin. The assets produce about 25 thousand barrels of oil equivalent per day (Mboe/d), Wells Fargo Securities said. The company’s overriding royalty interests came from the acreage, but should not affect its estimated sales prices of at least $225 million, Morgan Stanley said.

After its $1.9 billion January deal to buy Felix Energy LLC’s Anadarko Basin Stack acreage, Devon alienated some of its shareholders. With net debt of $7.7 billion, roughly two-thirds of sales proceeds will be directed to reducing debt, which could fall as much as 30% as a result, Barclays Equity said.

Following the transactions, Devon expects to have $5 billion in liquidity. In May, the company reported liquidity of $4.6 billion.

The company said it would dispose of $2 billion in assets and possibly up to $3 billion as it works to reduce debt. Along with its Mississippi Lime sale, the company has so far made agreements to sell $1.3 billion in noncore, gassy assets.

The sales accelerate repairs to the company’s balance sheet and improve net debt/EBITDA pro forma for the transaction to 2.8x at the end of 2017 from 4.4x at the end of 2016, said Evan Calio, analyst at Morgan Stanley.

Devon should be on track to aggressively pump accretive production growth when prices move up.

“This should support a faster activity ramp in Devon’s top-tier Stack and Delaware Basin assets earlier in the upcycle or provide more balance sheet protection,” Calio said, adding that Devon’s financial strength could allow it to separate from the mass of similar large-cap E&Ps.

Barclays expects Devon’s 50% interest in the Access Pipeline to attract bids in the $800 million to $1 billion range.

The timing of the upstream transactions beat analysts’ expectations. Devon had previously said first-round bid submissions were expected in June, with final agreement announcements following at midyear at the earliest, Calio said.

“The trade-off appears to be that prices received are modestly lower than our guidance,” he said.

However, some analysts are impressed by the prices that Devon has commanded for its acreage.

Barclays said it now expects Devon’s upstream asset sales will total about $2.5 billion and that the company was able to command more for its East Texas and Granite Wash acreage than the $600 million to $850 million analysts had anticipated.

“The sale of its northern Midland Basin overriding royalty interest comes as a surprise to us, fetching $139 million for only 1 Mboe/d of production covering royalties over 11,000 net acres,” Tudor, Pickering, Holt & Co. (TPH) said. TPH estimates that the acreage is mostly undeveloped.

For a company that has made major acquisitions the past few years, Devon appears to have at least partially satisfied its appetite. In addition to its Stack acquisition, Devon spent $6 billion to acquire Eagle Ford acreage. The company also has a 585,000-acre position in the Delaware Basin.

As prices eventually climb higher, Devon’s ultimate goal will be to focus on its balance sheet rather than increase capital spending, Barclays analyst Thomas Driscoll said. With its large E&P footprint, the company is more inclined to cut budgets and rely on advancing technology rather than M&A.

“Acquisitions may not offer enough synergy or balance sheet improvement to justify the multiples that may need to be paid,” Driscoll said. “In addition, Dave Hager shared his view that many financially distressed companies lack the superior assets that would make them attractive takeover targets.”

Jefferies LLC acted as the lead financial advisor to Devon on the transactions. RBC Richardson Barr also was a financial advisor to Devon, and Vinson & Elkins LLP was its legal advisor.

CEO: Despite Value, Not Everyone Wants Stack Acreage

Privately held HighMark Energy Operating LLC is pushing for more Stack assets with the purchase of 4,095 mostly contiguous acres in a deal with Atalaya Resources LLC, HighMark said June 2.
The assets are mostly in Blaine and Canadian counties, Oklahoma. Offset operators include Continental Resources Inc., Newfield Exploration Co. and Cimarex Energy Co., said Ali Ahmed, president of Irving-based HighMark.
The Stack play is buzzing with a sizeable number of deals announced, including Newfield’s $470 million purchase of 42,000 net acres from Chesapeake Energy Corp. That doesn’t mean, however, that everyone wants a position there.
Atalaya president and CEO Rob Johnston told Hart Energy that the company has picked up a lot of acreage since it began operating in early 2015. He said he isn’t keen on the Scoop play and bought into the Stack practically by accident.
“We think it is good acreage, just noncore for us,” Johnston said, noting that the company has amassed thousands of acres of land elsewhere.
The sales price was not disclosed. In April, Range Resources Corp. sold Stack acreage in Blaine, Canadian and other counties for about $6,000 per acre, excluding production value.
“EURs, production and IPs on offset wells are in line with what’s in public IR presentations regarding the play,” HighMark COO Steve Pugh said in a statement.
Johnston and many of his associates at Atalaya previously worked at Apache Corp., where their focus was on western Oklahoma. The company is more interested in sticking to what it knows: generally west of Blaine County.
Johnston, who served as vice president of the company’s central region and was a geologist in the Midcontinent in the 1980s, said that current commodity prices make for an ideal time to acquire, but prices cut both ways: It remains difficult to find areas to generate value.
“We still plan on drilling,” Johnston said, adding that one well drilled in Elk City, Oklahoma, is in its final stages. Johnston is hopeful the well will produce condensate and oil.
“It’s a struggle when you want to drill a well with a certain return on investment,” Johnston said.
While lower prices benefit Atalaya, which is able to acquire acreage for a fraction of costs, “I don’t want to wish the prices stay low, for everybody’s sake,” he said.
“At the same time, it’s an opportunity for us. The longer they stay low, the better it is for us,” he said.
Pugh said that the acquisition adds “significant acreage positions per section” to its holdings.
“In addition to HighMark’s ground-floor leasing program, we are pursuing other highly selective acquisitions in and around our target area, and we plan to commence development efforts in the second half of 2016,” he said.
HighMark Resources is backed by Natural Gas Partners, and its deal is the second collaboration between the senior executives of the two entities.

EnerVest’s May Surprise: $1.3 Billion In Eagle Ford Acquisitions

EnerVest Ltd., seizing on weakened commodity prices, said May 17 that it has scooped up $1.3 billion worth of Eagle Ford assets as it continues to build core positions in key regions.
The company said it signed or closed deals with three companies to add more than 17 Mboe/d to its production volumes. The company has been acquiring in Karnes County, Texas, since September.
“This is a great time in the commodity price cycle to buy oil assets, especially in the core of one of the hottest plays in the U.S.,” said John B. Walker, EnerVest CEO. “With stacked reservoirs of the Lower Eagle Ford, the Upper Eagle Ford and the Austin Chalk, we see plenty of development opportunities at today’s prices.
“With approximately $1.7 billion remaining in our latest fund, we are focused on acquiring the highest-margin, best-quality assets during the depression of our industry.”

In the most recent deal, EnerVest signed an agreement to acquire assets, 75% of which are operated, from BlackBrush Oil & Gas LP, a portfolio company of funds managed by Ares Management LP.
BlackBrush operates more than 300 wells and about 160,000 net acres in Dimmit, Frio, Karnes, La Salle, Maverick and McMullen counties, Texas. The sellers will retain a minority ownership stake in the remaining assets of BlackBrush. The acquisition is expected to close in June, subject to customary closing conditions and purchase price adjustments, EnerVest said. BlackBrush’s 5.17 Mboe/d of production is about 85% liquids.
EnerVest also said it acquired assets from affiliates of GulfTex Energy III LP, a private company backed with a $150 million commitment from Wells Fargo, Prudential and GSO Capital. In July, GulfTex completed a high-volume Eagleville Field well in Karnes County. IHS reported that the #1 Moczygemba Unit flowed 3.963 million barrels of oil and 3.131 million cubic feet of gas.
In late 2015, EnerVest also acquired a nonoperated position adjacent to the two new acquisitions in Karnes County. The company purchased the acreage in November from an undisclosed seller for $118 million.

Gauging Top M&A Picks In Second-Half 2016

The M&A world tilted slightly on its axis May 16 following a $4.4 billion deal by Range Resources Corp. to acquire Louisiana gas fields from Memorial Resource Development Corp.
Deals of a similar scale have been scarce since Noble Energy Inc.’s $3.9 billion merger with Rosetta Resources Inc. in May 2015. The proposed transaction prompted Goldman Sachs to recalibrate its M&A outlook.
“We see companies with weaker balance sheets and stronger assets [and vice versa] likely to consider M&A—this could be selling a company but also could be attempting to de-lever via an all-stock acquisition,” Goldman Sachs said in a May 20 report.
Some companies are more likely to deal than others. Besides Memorial Resource, RSP Permian Inc. has the highest rank of any company in Goldman Sachs’ M&A probability outlook.
Potential E&P targets for acquirers seeking high returns include:
• Murphy Oil Corp.;
• Denbury Resources Inc.;
• Apache Corp.; and
• Southwestern Energy Co.
Apache’s debt and the possibility that it may not be able to reduce leverage continue to worry Wall Street. Goldman Sachs said the fretting is “overdone, as we see the potential for the sale of non-EBITDA offshore projects and U.S. onshore noncore assets.”

At the heart of how E&P executives react to offers is an incalcuable ratio: hope vs. despair. Goldman Sachs believes companies aren’t ready to give up yet. Combined with money to spend, confidence in asset quality is a major factor, and E&Ps are generally led by teams with “confidence in capital availability to achieve desired growth,” the report said.
Other companies can be counted on to continue acquiring blocks of acreage.. Diamondback Energy Inc. continues to sport a formidable balance sheet and a low-cost asset base that is likely to have the company on the lookout for opportunistic acquisitions.

Much of 2015 was taken up with small asset deals, though at least 19 deals each exceeded $500 million, Goldman Sachs said.
With money to spend, whether a company will sell is based on confidence in asset quality and capital availability,” the report said. Memorial was keen to unload $1 billion in debt.
Goldman Sachs analysts reckon that for now, there is “not sufficient despair” to trigger deals. The analysts see M&A as more likely because of the shift in industry activity to drilling in core areas. As a result, and given the price paid by Range, the firm reassessed M&A targets and reduced credit provided for increasing acreage and zones.

While access to capital has been problematic for some public companies, about $13 billion has been raised in equity markets since January.
“Asset quality continues to be a key driver of interest and was the focus of the two most recent large transaction announcements,” according to Goldman Sachs. The Memorial Resources transaction gives Range Resources Louisiana unconventional gas, while Noble gained Permian and Eagle Ford acreage from Rosetta.
“We believe the sharp decline in commodity prices froze transactions during the period in between these two transactions,” the report said.

Parsley Finds More To Like In Delaware

Parsley Energy Inc. easily eclipsed the half-billion-dollar acquisition mark May 23, saying it has an agreement to acquire 30,000 mineral rights under its leasehold and other adjacent properties in Pecos and Reeves counties, Texas.
The $280.5 million cash deal is the second targeting the Delaware Basin after a slew of deals to lock up acreage in the Midland Basin in 2015. In April, Parsley said it agreed to purchase southern Delaware and Midland basin acreage for about $359 million.
The company has made about $348 million in acquisitions in 2016.
Chart: Parsley’s Permian Purchases, 2015-16
Parsley will fund the larger purchase through an offering of $200 million in debt and an announced sale of 8 million shares of its Class A common stock.
Mineral rghts acquisition highlights include:
• Mineral rights, 29,813 acres;
• Average royalty interest of 17.5%;
• In total, 186 gross/net wells (will see additional net revenue interest);
• Average net revenue interest on horizontal drilling locations increased to 92.5% from 75%;
• Estimated net current production associated with acquired mineral rights of 280 boe/d; and
• About 82% of the mineral acreage representing Parsley leasehold.
Parsley also acquired surface rights on about 80% of mineral acreage, eliminating compensation for surface damages and water procurement, among other costs, and facilitating optimal well and facility placement.
The company’s plan is to complete five to seven wells in the southern Delaware Basin this year, with three to five to be completed on the acquired mineral acreage.
The transaction is scheduled to close on or before July 14, subject to customary closing conditions.
Parsley also said it closed a $9 million purchase of additional working interests in Pecos and Reeves counties totaling 885 net acres in the southern Delaware Basin on May 10.

All of the incremental working interests are associated with mineral acreage, bringing Parsley's working interest to 100% and net revenue interest to 87.5% on the properties.
“Assuming just one flow unit in the Upper Wolfcamp target interval, the acquired working interests translate to an additional 10 net horizontal drilling locations with an average lateral length of 7,250 feet,” the company said.