After an anemic 2009, asset supply has rebounded in 2010 with $10.7 billion of deals announced. RBC Richardson Barr estimates that this year, buyers will see more than $30 billion of assets hit the market, driven primarily by five themes:

  • Large-cap public companies that intend to use sale proceeds to fund resource-play development.
  • A few majors repositioning their portfolios to enhance returns, such as ConocoPhillips.
  • Large-cap publics implementing a “shrink-to-grow” strategy by decreasing exposure to multiple basins.
  • Companies with significant shale-play exposure looking for joint-venture partners to share the development capital burden.
  • Private companies opportunistically selling oil assets if valuations continue to stay strong.

Capital markets. While the overly liquid capital markets were detrimental to the A&D market in 2009, the normal historical relationship between those two markets seems to have returned. Year-to-date asset sales are outpacing proceeds from the capital markets by a significant amount. Additionally, use of proceeds for equity stories is now mostly limited to acquisition financing, i.e., EV Energy Partners financing its Ohio acquisition and Berry Petroleum Co. financing its Wolfberry acquisition, as opposed to 2009’s one-time permission to raise equity as a means to pay down debt.

Buyer demand. For resource plays, majors and internationals remain the dominant buyers of shale acreage, though some large-cap publics (e.g., Petrohawk Energy Corp., Chesapeake Energy Corp., Exco Resources Inc.) have returned to their land-grab strategy of 2008. Majors and internationals continue to enter into joint ventures over existing acreage blocks and fund a considerable portion of their partner's development.

Appetite for conventional oil assets is still mostly dominated by large-cap public companies, but some master limited partnerships (MLPs) have moved back into this acquisition market as the equity capital markets have returned and provided them with a financing option.

The demand for long-lived oil properties is the highest among any property type and continues to significantly outstrip supply. As such, buyers have a seemingly unlimited appetite for oil deals and continue to pay healthy multiples for the assets.

Buyers for conventional-gas assets continue to be financial and private-equity players. This sector has accounted for 62% of all conventional gas deals sold in the past 12 months. MLPs, despite their current appetite for oil, are also becoming larger participants for conventional-gas assets as the supply of oil assets remains modest and extremely competitive.

Valuations. Conventional-asset valuations for the most part have rebounded along with the A&D market year-to-date. Oily assets are the preferred commodity and currently command 20% to 40% premiums to gas transactions. For example, oil assets in the Permian Basin are trading at $90,000 to $110,000 per daily flowing barrel, nearly back to their high-water mark in 2008.

Long-lived conventional gas assets have also enjoyed a rise in valuation levels as the forward curve has remained somewhat stable, receiving valuations in the range of $10,000 to $13,000 per daily flowing thousand cubic feet equivalent (Mcfe). The exceptions are Rockies gas assets, due to differentials and environmental concerns, and Gulf Coast assets, due to shorter reserves-to-production ratios.

Most oily assets are trading hands at discount rates of PV-8 to PV-10 for proved developed producing (PDP) reserves, while gas assets are trading at PDP PV-10 to PV-15. Buyers continue to struggle in ascribing value to gas proved undeveloped locations (PUDs); however, strong margins and continued confidence in oil are allowing buyers to risk PDP more aggressively for oil assets, in essence, giving value to the PUD.

Several resource play acreage valuations have actually exceeded 2008 levels. The Marcellus continues to be the premier area of interest due to its superior economics and relative abundance of undeveloped acreage in the core areas. Additionally, Eagle Ford acreage is starting to attract significant attention, especially because the high liquids content in certain parts of the play improves economics. A limited number of transactions have taken place in the Haynesville, Fayetteville and Woodford shale plays, because a small number of players control most of the acreage.

On the oil side, Bakken and Wolfberry acreage valuations are largely determined by location within the play. Acreage centered in the hearts of these plays can garner valuations exceeding $4,000 per acre. As fringe areas are proved out, these should increase with higher crude prices.

—Scott Richardson, Craig Lande, Kevin Juno, RBC Richardson Barr,
713-585-3300