Lease expirations are forcing the hand of large independent producers and are pushing the pace of drilling in shale plays, according to J.J. McAnelly, a partner with law firm Bracewell & Giuliani LLP. This urgency is the driver behind a spate of joint ventures in the shales, nudging independents into the sellers market.
“Obviously, they’ve got a lot of capital needs. The forecast for capital expenditures to develop the shale plays is large. They need capital providers to share the risk.”
McAnelly spoke at Oil and Gas Investor’s recent Energy Capital Conference in Houston.
Buyers into this joint-venture environment include national oil companies and non-E&P financial investors such as Fortune 500 companies, hedge funds and private-equity providers. This new wave of onshore U.S. resource-play buyer tends to be well funded with no shale experience, and often with no onshore U.S. or even E&P experience. McAnelly dubbed them “newbies.”
These new buyers are motivated by the prospect of getting access to resource plays, knowledge of shale development, quick deployment of capital, and diversification, he said.
“There is industry buzz about the shale plays everywhere and everybody wants in. For the newbies, it’s just plug in and go. It’s easy for them to quickly ram a lot of capital out the door.”
Gaining expertise is a major driver for international companies seeking entry, and often the primary driver. “They want to get the expertise, export it and take it to the shales in Europe, Africa and other plays to exploit those resources. It’s misunderstood by a lot of analysts who are simply looking at the dollar items in these deal structures.”
Diversification is another motivator. “For someone with Gulf of Mexico problems, onshore is shining,” he said.
Overcoming barriers to entry is significant for newcomers as well, a hurdle the joint-venture structure bypasses. “If you call around to counties in Wyoming with the Niobrara or down in South Texas, you hear ‘land rush.’ It’s tough to get landmen and brokers hired. Having those folks already on retainer helps out for the newbies.”
Add the difficulties of government, state and local regulation, in which most established players have specific departments to work the bureaucracy, and a joint venture makes even more sense. “It’s a long lead time to build a program from the ground up. The joint-venture structure avoids a lot of that.”
McAnelly says more deals are in the marketplace and more joint ventures are imminent.
“Newbies will continue to fill a void, and more so private equities and hedge funds.”
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