Oilfield Service A&D: Circling Sharks Smell Bait
While analysts say upstream companies are poised to restore power to their A&D engines, service and supply companies will instead be looking for cover. The year 2015 has shown that the days of magical thinking—wishing for something to make it happen—are over.
J. David Anderson, analyst with Barclays Capital Inc., said higher oil prices and bottoming cost curves will be positive signs for oilfield services and equipment. So will a little shark bait.
“The credit markets are telling us there will be blood in the water,” Anderson said, “probably fairly soon.”
The market cap of small- and mid-cap companies has shriveled by 70% in the past 18 months—a revealing statistic that illustrates the challenge of finding “investable small- and mid-cap ideas with liquidity.” In the past 12 months, land drillers have fallen the least, by 30%, and proppant and service companies the most.
The services industry needs to see companies close up shop or consolidate in a sector with too many companies and too much equipment.
“The oilfield services industry is at the epicenter of the recalibration of the supply cost curve,” Anderson said. “As the depth of the oil price downturn approaches the 18-month mark [longer than any other downturn over the past 20 years], it’s just a matter of time for the industry to go through a phase of bankruptcies and mergers of desperation.”
Small- to mid-cap companies’ leverage ratios have spiked from 1.2x EV/EBITDA to 11.6x over the past year.
“Credit markets smell imminent trouble with the high-yield oilfield service index trading over 1,000 basis points above corporate levels, by far the widest spread seen,” Anderson said. “There needs to be blood: with too many companies, too much equipment and not enough capital in the face of weaker upstream demand over the next several years.”
Among drillers, roll-ups are possible, and contractors will look to consolidate, but only so many cost efficiencies can be squeezed out of combining drilling equipment companies. The biggest expense is capital tied up in equipment, said Osmar Abib, global head of oil and gas at Credit Suisse.
“Part of the challenge will be relative value issues and part of the challenge will be that a number of those companies have a lot of debt,” Abib said at a December media roundtable held in Houston.
Buyers will have to be wary of debt-laden targets that could add to their leverage, he said.
“I think that’s going to inhibit a lot of activity, which might mean a lot of those companies might have to be restructured,” Abib said. In bankruptcy or through negotiations with lenders, debt could be reduced to a more manageable level that would enable M&A.
Potential acquirers also may lack incentives. Since rig counts have fallen, the question becomes, why would a company shut down equipment just to add more? “You only do it if you see a really good relative value and benefits in greater size and asset diversification,” he said.
Due to unpredictable commodity prices, service and equipment M&A is likely to be limited until the roughest part of the ride is over.
“I will tell you that in this business and in this type of environment, companies are thinking about it,” Abib said. “However, the current level of uncertainty and volatility really makes M&A challenging—at least in the near term.” —Darren Barbee
A&D’s Inferno: Low Prices May Force Distressed E&Ps To Sell
Pessimism breeds fire sales, at least in the oil and gas industry. But buyers and sellers may want to heed the Talking Heads’ classic song, “Burning Down the House,” which cautions: “Watch out, you might get what you’re after.”
About 75% of oil and gas CFOs expect M&A activity to rise in 2016, according to BDO USA LLP’s annual Energy Outlook Survey. In 2015, 56% of CFOs thought deals would increase.
A&D activity was slower than experts forecast in 2015, but deal pace has started to pick up. Schlumberger Ltd. has acquired smaller rivals that have struggled in the rocky commodity price environment.
The overall A&D landscape saw far fewer deals and far lower values—an average of $443 million in 2015 compared to $673 million in 2014.
Roughly 49% of CFOs believe undervalued oil and gas assets will be the primary driver of transactions as larger companies and investors target distressed companies looking to raise capital by divesting assets.
“Throughout 2015, we saw many M&A players hesitant to engage in deal activity, likely because sellers hoped the bust cycle would balance out throughout the year and drive valuations up,” said Charles Dewhurst, leader of BDO’s Natural Resources practice. “As we enter the New Year, they are letting go of the idea of rapid recovery and may look to sell before valuations bottom out further.”
BP Buys Devon’s San Juan Gas Assets
BP Plc in December bought one of Devon Energy Corp.’s storied assets—the Northeast Blanco Unit (NEBU) in the San Juan Basin. The acquisition adds all of Devon’s regional holdings in the basin, which spans northern New Mexico and southern Colorado. The value of the transaction was not disclosed.
It’s the first major acquisition by BP’s Houston-based, Lower 48 onshore oil and natural gas business in seven years and “highlights the commitment to the San Juan Basin,” the company said. The purchase revolved around Devon’s operated interest in the NEBU, a section of federal lands in San Juan and Rio Arriba counties of New Mexico.
BP has had a presence in the area since the 1920s. The company anticipates taking over operations of the unit’s 480 wells and 33,000 gross acres this quarter.
“This acquisition clearly demonstrates the importance of New Mexico and the San Juan Basin to our future,” said David Lawler, chief executive of BP’s Lower 48 onshore business. “It’s also consistent with our strategy of selectively expanding in BP’s existing onshore basins, where we can link our innovative well design capability with our extensive subsurface expertise to generate industry-leading capital efficiency.”
In the San Juan Basin, BP holds more than 550,000 net acres and has average daily net production of approximately 100,000 boe.
Devon used new techniques to produce coalbed methane in the NEBU, which had seen little success before 1988. Production from the NEBU helped make Devon one of New Mexico’s top natural gas producers.
Swift Sells Louisiana Assets, Seeks Sure Footing In Bankruptcy
Swift Energy Co. found a buyer in Louisiana and declared bankruptcy on a busy Dec. 31 after skipping a December debt interest payment that signaled restructuring was on the way. The company entered a purchase and sale agreement that gives Texegy LLC a 75% share of Swift’s holdings in the oil-weighted South Bearhead Creek and Burr Ferry fields in central Louisiana.
Swift also said it reached a restructuring agreement with a majority of its senior note holders to convert all senior notes to equity. The company filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court in Delaware.
Swift’s restructure agreement will also provide the company with a $75 million debtor-in-possession financing.
With its core assets in the Eagle Ford, Swift’s deal with Texegy is an effort to increase liquidity as Texegy takes over operations. Terms of the deal were not disclosed.
The company’s assets in Louisiana include proved reserves of 36 MMboe and 15% of the company’s total production. Swift’s Lake Washington assets produced 2,734 boe/d in third-quarter 2015.
At closing, Swift and Texegy plan to enter a joint venture to continue operation and development of the properties. The JV agreements will make Texegy’s affiliate, SV Energy Co., operator of the properties. Swift and Texegy will plan future development.
Swift CEO Terry Swift said his company will work alongside Texegy to exploit and enhance the value of the Louisiana assets. “This arrangement marks the beginning of a strategic partnership while strengthening our liquidity profile,” he said.
The Louisiana assets fit with Texegy’s portfolio of producing conventional assets in Texas and Louisiana, said Rajan Ahuja, the company’s CEO. “We are excited to work along the Swift team to develop this area in an optimum manner,” he said.
Smack In The Midland: Parsley’s Next Deal
Parsley Energy Inc. can’t stop: The company said Dec. 9 it had entered into an agreement to purchase Midland Basin assets for $148.5 million.
It will once again sell equity in the company to help fund the transaction.
In an agreement with PCORE Exploration & Production LLC, a portfolio company of Natural Gas Partners, Parsley will acquire undeveloped acreage and producing oil and gas properties adjacent to its operating areas in Upton, Reagan and Glasscock counties, Texas.
As part of the deal, Parsley is set to gain 238 net horizontal drilling locations across 5,274 net surface acres in its core operating area. The company will have a high average working interest of 87% and a low average royalty burden of 20%.
For November, estimated net production was about 1,000 boe/d from three horizontal wells. The deal also includes one drilled horizontal well that is anticipated to be completed by the seller prior to closing, which is scheduled for early January.
The assets will be 100% operated at closing with no obligation to develop for two years. Infrastructure is in place to support ongoing horizontal drilling operations.
Parsley will sell shares for at least the third time in 2015 to fund its acquisition. The upsized offering includes shares owned by NGP X US Holdings LP, one of the company’s stockholders.
The company is selling 11.2 million shares of its Class A common stock plus about 1.1 million shares owned by its stockholder. Parsley and NGP have granted the underwriters an option to purchase additional shares.
In September, Parsley sold about 15 million shares for net proceeds of $217 million. As of November, the company had $556 million in debt and $123 million in cash, or a 24% net/debt ratio and a 2.3x net debt/EBITDA ratio, said Robert Du Bof, analyst with Oppenheimer & Co. Inc.
“With the revolver undrawn and recently upsized to $575 million from $500 million, liquidity stands at just under $700 million,” he said in a Nov. 4 report.
In February, Parsley also sold about 15 million shares in a private stock placement, adding roughly $224 million in net proceeds.
Goldman Sachs & Co. and Credit Suisse Securities (USA) LLC are underwriters for Parsley’s recent equity offering.
Hilcorp, Carlyle Join Forces To Acquire Assets
Hilcorp Energy Co., a closely held U.S. independent E&P company, has formed a partnership with private equity firm Carlyle Group LP to acquire and develop North American oil and gas properties.
Carlyle’s Energy Mezzanine Opportunities Fund LP and Carlyle Energy Mezzanine Opportunities Fund II LP have agreed to invest up to $1.24 billion in the newly formed partnership called Hilcorp Energy Development LP.
Oil and gas companies are increasingly looking to private equity firms as low commodity prices sap cash flow and access to capital markets is squeezed. U.S. crude oil prices are hovering around seven-year lows amid a global supply glut.
On Dec. 18, Moody’s said it was reviewing 29 oil and gas companies for downgrade, citing weak oil and gas prices. Hilcorp was on the rating agency’s list.
Houston-based Hilcorp, founded by Jeffrey Hildebrand in 1989, has operations in the Gulf Coast of Texas and Louisiana, the U.S. Northeast and Alaska.
Earthstone Energy Adds Third Core With Permian Debut
Earthstone Energy Inc. is making its debut in the Permian Basin after a busy year of deal-making in other major shale plays. The company plans to acquire Lynden Energy Corp. through an all-stock transaction valued at about $67.2 million, based on Lynden’s Dec. 16 closing price.
Lynden, headquartered in Vancouver, B.C., has 14,765 gross (5,883 net) acres in in Glasscock, Midland, Martin and Howard counties, Texas. The properties have more than 150 proved gross vertical Wolfberry locations, with potential for 50 gross horizontal Wolfcamp A and B wells.
The company also has acreage in a single contiguous lease covering 104,000 gross (52,000 net) acres in Coke, Mitchell and Sterling counties on the eastern shelf of the Permian Basin. Through the acquisition, The Woodlands, Texas-based Earthstone will add another core drilling area to its asset portfolio, which currently includes Bakken and Eagle Ford acreage.
Frank Lodzinski, Earthstone president and CEO, said in a statement that buying Lynden falls in line with the company’s strategy of gaining exposure to premium plays with “low-cost structures and compelling economics. Our acquisition of Lynden Energy is a pivotal event for our company. We will diversify our asset base and move into attractive acreage with significant horizontal potential in the Midland Basin,” Lodzinski said.
Daily production is about 1,450 boe, of which 53% is oil and 77% is liquids. CrownQuest Operating LLC, based in Midland, Texas, is the operator of most of Lynden’s assets.
“While the transaction puts the company in a new basin, rest assured that our management team has significant experience across the entire Permian Basin,” Lodzinski said.
TRANSACTION HIGHLIGHTS
OKLAHOMA
Maverick Brothers Resources, backed by Post Oak Energy Capital, has closed the sale of its Fonda Project in Oklahoma’s Stack Play to an undisclosed buyer for an undisclosed price.
The properties are in northeast Dewey County and consist of 20,870 gross (14,042 net) acres of leasehold in 33 contiguous sections, including one vertical and eight horizontal Mississippian wells.
Maverick will use the proceeds to begin acquiring leasehold on new ideas under development and to purchase producing properties in the U.S., the release said.
Maverick, based in Enid, Okla., and led by Bret Brickman, began developing the Fonda properties in 2010 to test the viability of drilling and completing horizontal wells in the lower Mississippian Osage chert at depths below 10,000 feet. The depth was nearly twice that of what most other companies were drilling in the Mississippian at the time, according to the release.
Maverick’s early results prompted the company to expand its leasehold position in the play.
PICEANCE BASIN
Denver-based Laramie Energy Inc. plans to buy assets in the Piceance Basin in Colorado from an undisclosed seller for $157.5 million.
The acquisition totals 71,000 net acres, with more than 90% held by production. The price equates to about $1,800 per flowing Mcfe/d, according to Tudor, Pickering, Holt & Co. estimates. Production as of November was 89 MMcfe/d. Upside includes approximately 5,000 drilling locations.
Estimated proved reserves are 541 Bcfe, proved and probable reserves of 1.2 Tcfe and proved, probable and possible reserves of 5 Tcfe as of November 2015.
Following the transaction, Par Pacific Holdings Inc., an energy holding company in Houston, will hold a 42% interest in Laramie Energy, which is led by Robert Boswell. Laramie additionally is backed by more than $300 million in commitments from EnCap Investments, Avista Capital and DLJ Merchant Banking Partners.
Laramie will fund the deal with $57.5 million in debt, $30 million of preferred equity issued to a major financial institution and $70 million of common equity investment, including $55 million from Par Pacific. Laramie focuses on the Piceance Basin’s Williams Fork and Mancos Shale plays in western Colorado.
MIDCONTINENT
Lucas Energy Inc., based in Houston, announced it will acquire working interests in producing properties and undeveloped acreage in the Midcontinent region from 21 different entities and individuals.
The properties, which are on two largely contiguous acreage blocks in the liquids-rich region, produce more than 1,200 bbl/d net, 55% liquids, from 114 wells.
Most production comes from the Hunton Formation on 43,000 gross (9,900 net) central Oklahoma acres. Offset development drilling opportunities for at least 40 additional wells have been identified.
A third-party reserve report from Dec. 1 estimates there are 5.4MMboe of proved developed reserves—6% oil, 47% NGLs and 47% gas.
In exchange for the assets being acquired, Lucas will assume about $31.3 million in commercial bank debt and will pay about $5 million in cash. It will also issue 552,000 shares of a newly designated form of convertible preferred stock and about 13 million common shares.
MIDLAND BASIN
Resolute Energy Corp. has closed the sale of its Gardendale assets in the Midland Basin for $177.5 million.
The Gardendale assets cover 4,700 gross (4,600 net) acres in Midland and Ector counties, Texas. The acreage includes resource potential in the Middle and Lower Spraberry and Wolfcamp B formations.
The Denver-based company sold the assets to an undisclosed company. Proceeds will be used to repay $95 million under the company’s revolving credit facility, representing all amounts currently outstanding. The facility will remain in place.
WILLISTON BASIN
properties for $16.5 million cash. The seller wasn’t disclosed.
The assets include a parcel of oil and gas leases covering 51,305 net acres, producing oil and gas wells, currently shut-in wells and associated facilities in North Dakota and Montana.
The acreage includes rights to the top of the Bakken Shale and a portion below. The properties produce about 720 bbl/d of oil from 41 net producing wells.
Proved reserves consist of 8.5 MMbbl with a net present value of $84.9 million as of the Oct. 1 effective date of the transaction, according to Netherland Sewell & Associates.
NORTH DAKOTA, MONTANA
Angelus Private Equity Group LLC, Houston, has agreed to buy a portion of Emerald Oil Inc.’s undeveloped leaseholds in Montana and North Dakota for about $9.75 million.
The assets include 9,750 net acres and production from nonoperated wells. Downward adjustments for title and environmental defects could affect the purchase price, Emerald said. Proceeds will repay outstanding revolving credit facility borrowing.
BAKKEN SHALE
Enerplus Corp. said Dec. 21 it had completed the sale of a portion of its nonoperated interest in the Bakken Shale of North Dakota to an undisclosed buyer for about $80 million in cash.
Proceeds will be used to reduce the Calgary, Alberta-based company’s outstanding bank debt and increase focus on its operated North Dakota acreage. The company holds about 74,000 net acres in the Williston Basin and has 270 future net drilling locations, according to the company’s website.
EAGLE FORD
Statoil ASA announced Dec. 11 it had become sole operator of its Eagle Ford joint venture.
The Norwegian company acquired a 13% interest in the JV from Repsol SA. Statoil said it expects the deal to allow it to pursue more optimal field development, efficient operations and cost savings, thus helping it be more resilient to low oil prices.
ALBERTA, CANADA
Calgary-based Raging River Exploration Inc. said Dec. 10 it has agreed to acquire privately held Anegada Energy Corp. for C$126 million (US$92.2 million).
Anegada has 2,750 boe/d of Viking light oil assets. The assets are complementary to Raging River’s existing Viking portfolio in southwestern Saskatchewan and southeastern Alberta, according to the company.
MARKETPLACE CHATTER
Waiting on better times. After suffering the whiplash of falling prices, Gastar Exploration Inc., Houston, closed on its new home in the Midcontinent in December and is still shopping its Marcellus Shale and Utica/Point Pleasant acreage in Marshall and Wetzel counties, W.V.
At a December presentation, Russ Porter, Gastar president and CEO, said the company is hopeful it can sell the assets, including 11,600 undeveloped acres with production of 47.6 MMcfe/d, and has earmarked the proceeds for liquidity.
“Let’s be honest: Our goal is survival, just like everybody else. We’re going to make sure we get through to the other side of late 2016 or early 2017,” he said.
The more the merrier. Curiously, a deconsolidation trend is occurring in the Permian Basin, Will Giraud, executive vice president and chief commercial officer for Houston-based Concho Resources Inc., said at Hart Energy’s Executive Oil Conference in November. “That’s counter to the expectations of many people that low prices are going to drive significant industry consolidation.”
New companies continue to come to the basin and Giraud expects that trend to continue. “The Permian is the place—it’s the last oil basin standing, the last place you can put together a material position, the last place you can drill with today’s prices and make money, the last place with tremendous resource yet to be discovered, and the last place you can still get step-changes in efficiency,” he said.
Icahn spotting. There’s plenty of talk around the water coolers since activist investor Carl Icahn targeted Freeport-McMoRan Inc. Icahn’s interest has been met with a familiar response: “Cave in.” The company plans to run an auction process for its oil and gas assets in early 2016, according to people familiar with the matter, Reuters reported.
The process would be the company’s first concrete move to end its ill-fated foray into oil and gas since its announcement in October that would explore strategic options for the assets, including a spin-off, joint venture or public offering.
Phoenix, Ariz.-based Freeport-McMoRan’s board has retained investment bank Lazard Ltd. to advise on a possible sale of the company’s entire oil and gas interests, which could be worth more than $3 billion, Reuters said.
Deal Making In An Age Of Frustration
For most of 2015, corporate M&A took a backseat to smaller acquisitions while overall values and transaction numbers activity remained in the basement.
Nonetheless, industry watchers expect a bump-up in A&D activity from bankruptcies and core restructurings in 2016 as companies continue to be battered by low commodity prices. Despite expectations for a flood of filings in 2015, only a slow trickle has occurred to date.
Keith Buchanan, managing director of KeyBanc Capital Markets, told Oil and Gas Investor bankrupcties will continue at a similar pace into 2016.
“I think if you do a screen on the companies that are strained on liquidity and leverage, you can pick the obvious candidates that might be out there,” said Buchanan, who is also head of KeyBanc’s oil and gas group. Here are excerpts from the conversation:
Investor What do you see happening in the M&A arena during 2016?
Buchanan There’s a strong correlation between volatility in oil and gas prices and M&A activity. When times are volatile, M&A activity is less. That’s what we saw earlier this year and that’s what we saw back in 2008-2009. When and if prices do stabilize, I think we’ll see more M&A activity.
It’s hard to predict the large corporate transactions. So far this year, there’s been a couple of really big transactions, but not much else. If you take those away, the activity level is way, way down for 2015. There are still some pockets of strength. There’s a lot of activity in the Permian Basin, whether it be Midland or Delaware basins, and I think that will continue.
But once prices stabilize, then we’ll have a much better view on where asset values are and we’ll be able to see both buyers and sellers agree on valuation.
As we get into the first part of next year, companies are going to have to sell assets as that’s the only place that they can raise capital. Capital markets are largely shut down for most companies, so they’ll have to sell assets … to improve their liquidity and try to fix their balance sheets.
Investor What’s your sense of how many companies out there are on the brink of bankruptcy or have the potential to seek bankruptcy protection?
Buchanan It depends on what happens in the capital markets. In the spring of 2015, the capital markets came back fairly robustly and that allowed some companies to not necessarily fix, but at least improve their balance sheets to avoid a bankruptcy filing.
If the capital markets are not there and companies have no way to fix their problems, then maybe a bankruptcy or a core restructuring is the right thing to do to eliminate the debt and right-size the company’s balance sheet so that they can operate going forward.
We’ve seen a fair amount of bankruptcies so far this year. Will we continue to see some more next year? Absolutely.
Investor What will that mean for distressed asset sales?
Buchanan Asset sales may be where companies have to go to raise capital.
If the high-yield market continues to remain shut down for the low-single B and worse credits, equity markets are largely closed except for the Permian companies then … they’ll have to sell assets.
Companies get distressed because usually their assets are not in the core of the core or in the best basins. Will there be a value or a bid for assets? Sure, it just may not be the price that they like.
I do think we’re going to see a pick-up in asset sale activity once we get some stability in commodity prices and buyers and sellers can really agree on what value is.
Investor What are your thoughts on private equity firms continuing to inject money into the industry at a point when many believe it’s time to slow up?
Buchanan A lot of private equity capital is sitting on the sidelines either committed with a management team that is looking for their inaugural asset, or they’re waiting to find a management team to back.
They’re going to be prudent in their investment decisions and they’re going to back good-management teams that are going to pursue quality assets and quality opportunities and try to make money for their investors. If they don’t think it’s the right time to invest at these prices, they won’t. But if they do think they can do it and make money, they will.
That might prolong this lower-for-longer mentality and situation that we’re in because it’s another form of capital that is out drilling wells or working over wells to try to increase production from the asset base.
Investor Further thoughts on what we will see in 2016?
Buchanan Companies need to be prepared for another challenging year. It doesn’t look like commodity prices are going to return to 2014 levels in oil or 2012 levels on gas. We’ve been in a long-term declining natural gas price environment for a while, and oil has only been down a little over 12 months. Companies just need to be prepared for a challenged environment in 2016.
Investor What’s your thesis regarding oil and gas prices in 2016?
Buchanan I think 2016 is going to continue to be a challenging environment for both oil and gas prices due to persistent oversupply. Gas has a little bit additional headwind because of weather patterns. We’ve had a strong El Niño weather pattern this year, which has led to warm weather on the East Coast and low gas prices in the near term. And I think gas is going to continue to be a challenge due to oversupply and lack of demand.
On oil it continues to be oversupply as well, although we are starting to be see some positives developing in the oil market that might lead to a better outlook in the back half of 2016. Supply is starting to reduce, but we still have too much storage and not enough demand to take up that extra supply.
And again, I think the industry is a bit of a victim of their own successes. They found ways to find oil and gas very efficiently and in large quantities and that led to this problem we have today. But overall it’s going to continue to be a challenged environment for both oil and gas prices next year. —Emily Moser