EXXONMOBIL EYES ASSETS, NOT TAKEOVERS

Discretion, it seems, is the better part of value.

Given all the companies looking to sell out in the downturn, the world’s largest publicly traded oil and gas company, ExxonMobil Corp., would appear to be a likely buyer. But for now, takeovers are a nonstarter for the Irving, Texas-based company. ExxonMobil executives don’t want the debt that would come with a merger.

President and CEO Rex Tillerson made it clear during ExxonMobil’s March 2 analyst day that an upstream company-level M&A deal was not imminent.

ExxonMobil will still pursue asset deals of varying sizes. Anything more would be challenging, particularly for certain pure-play E&Ps, Tillerson said in a webcast.

Value in the industry has been largely destroyed through the downturn by companies encumbering assets with low-return capital, he said. ExxonMobil isn’t willing to inherit a highly leveraged company’s debt through a potential merger. Tillerson likened the scenario to buying a home with a large mortgage—the value is missing.

“It’s a tough place that they’re in and it’s tough for us when we would like to do something—we would. We see there are a lot of quality resources out there, it’s just how they’ve been encumbered,” he said.

Without ExxonMobil willing to roll the dice on divestment targets, something will need to change or the industry will be in trouble, Sam Margolin, research analyst with Cowen & Co., said in a March 2 report.

“We see management’s assessment of industry capital inefficiency as unsustainable, particularly within the context of nearly $50 billion of divestment targets among the upstream universe, potentially allowing XOM to enter a corporate M&A phase in a more capital-constrained environment,” Margolin said.

ExxonMobil anticipates capital spending of $23 billion in 2016, down 25% from $31.1 billion in 2015. The plan reflects lower upstream project spending as the company continues to bring major projects online.

In terms of growth, the company aims to focus on the most attractive opportunities for the next 30 years.

The strategy is exemplified by the company’s purchase of XTO Energy Inc. in June 2010. The deal opened the door to unconventionals for ExxonMobil, which the company realized would be an important new resource base for the world, Tillerson said.

ExxonMobil has continued to enhance its U.S. unconventional acreage position through trades and farm-ins, particularly in the Permian Basin, he added.

Since 2014, the company has completed five transactions in the Permian targeting the Midland/Wolfcamp and Spraberry area. ExxonMobil now has roughly 135,000 operated net acres in the heart of the play.

“We are constantly self-assessing: are we positioned for the world we’re in not just today, but the world we think it’s going to be ... We are never standing still,” he said.

The company is purposely tight-lipped about any specific plans because a lot of what it does has “an enormous competitive advantage,” he said.

CITIGROUP: COMPONENTS OF TALL OAK DEAL ARE ROCK SOLID

On the surface, EnLink Midstream LLC paid $1.55 billion for subsidiaries of Tall Oak Midstream LLC in January and, one month later, the company’s market capitalization had slumped to only $1.3 billion. But it’s the subsurface that drives this purchase and, as Citigroup Inc.’s Jeff Sieler explained at the recent NAPE Business Conference, the qualities involved in this transaction, well, rock.

“There’s a line item in there that says 1,000 drill locations,” said Sieler, who is managing director and co-head, U.S. energy A&D. “The reality is, it’s double or triple that, just on the acreage.”

In the greater area of Oklahoma’s Stack and Central North Oklahoma Woodford (CNOW) plays, figures will approach 11,000 unrisked drill locations and around 5,000 risked locations, he said.

“Those are really stellar numbers,” Sieler said. “I think the thing that stood out to our subsurface team as we worked this particular set of assets was the economic robustness that we saw associated with it.”

The best-known formations involved are the Woodford and Meramec, with Tall Oak’s midstream assets on acreage located over the core of the play. The acreage is operated by Felix Energy, a Denver-based E&P that was acquired by Devon Energy Corp., EnLink’s general partner, as part of a $2.5 billion deal announced in December.

The midstream assets are strong and include:

• Pipeline systems of more than 200 miles in the Stack and 75 miles in the CNOW with capacity of 175 MMcf/d and the flexibility to expand to over 1 Bcf/d;

• Fee-based contracts that average terms of 15 years; and

• New, state-of-the-art cryogenic processing plants with 175 MMcf/d of capacity and the ability to expand to 700 MMcf/d.

Sieler, who was trained as a petroleum engineer and worked for Shell, Kinder Morgan Inc. and Marathon Oil Corp. before moving into the A&D side of the business, acknowledged that “sweet spots” in plays tend to change over time, but being positioned to handle growth in the play is a plus.

And the play is growing. Not all rigs pulled from unconventional operations around the country are stacked up—some are being relocated into the Stack.

From May to August of last year, the number of rigs moving into Kingfisher and Canadian counties rose 50%, from 22 to 33. Houston-based Newfield Exploration Co. has indicated that it can position as many as 24 wells in the Stack area, and what Sieler called “a remarkable number” in the Meramec and Woodford.

The boomlet is propelled by economics: The breakeven price for a barrel of oil in the stacked Meramec is less than $20, creating unusually happy margins during a time when WTI struggles to stay in the $30s. That’s possible because of the unique subsurface characteristics at play in the region, characteristics that caught the attention of the Citi team last year as it analyzed the transaction for its client.

The internal rates of return that Citi identified in the Stack were the best to be found in the Lower 48, Sieler said. The area had been studied by E&Ps and there was plenty of data to confirm the analysis that the 500-foot thicknesses associated with Mississippian rock in the Meramec and Osage plays made for ideal landings for horizontal laterals. Underlying that was the world-class Woodford, with porosities in excess of 10% total organic content (TOC).

To the northeast was the CNOW, an oil-rich area with good economics as well. Resource potential includes 52 Tcf and at least 20 oil wells with 1 MMboe. Tall Oak’s infrastructure area totaled 430,000 acres, meaning plenty of opportunity to expand.

“That infrastructure is sitting not only on top of the rock thickness but sitting on top of the fluid mix that is the most productive and is the most economic two-phase flow stream,” Sieler said. “Felix is sitting on a central location to where pipes are located.”

The more the Citi subsurface team scrutinized the area involved in the deal, the more it found elements to warm the cockles of an energy investment banker’s heart: growing rig count, shallow decline rates of 61% to 63%, access to liquids-rich gas, close proximity to downstream markets.

Finally, a burst of efficiency by applying lessons learned in earlier plays.

“What I saw going into the Eagle Ford was literally hundreds of millions of dollars of development, millions and millions of dollars of research, not only by the operators there but by the service companies,” Sieler said. “I looked at the Stack and one thing stands out to me: Many of these industry-leading unconventional operators are taking their best practices and applying them faster.”

There are fewer economic drill locations because commodity prices are low and the widespread assumption in the industry is that they will remain so. That’s why plays like Tall Oak that excite upstream companies will excite midstream companies as well.

“Midstream is underpinned by long-lasting forecasts with certainty,” Sieler said. “That’s what is guiding midstream.”

ANADARKO BASIN REDUX: FOURPOINT TAPS CHESAPEAKE ASSETS AGAIN

Denver-based FourPoint Energy LLC plans to acquire all of Chesapeake Energy Corp.’s remaining western Anadarko Basin oil and gas assets for $385 million.

For Chesapeake, it is the second announced divestiture in two days following its affiliates’ divestiture of mineral and royalty interests for $128 million. The company, which has large amounts of debt maturing through 2017, said Feb. 24 that it is targeting up to $1 billion in asset divestitures in 2016.

The assets include an interest in nearly 3,500 producing wells primarily in the Granite Wash, Missourian Wash, Upper and Lower Cleveland and Tonkawa formations.

Production is about 67% natural gas and 33% oil and NGLs. The assets cover about 473,000 net acres in 15 counties in Western Oklahoma and the Texas Panhandle and are 98% HBP.

George Solich, president and CEO of FourPoint, said the acquisition will significantly increase its position in the western Anadarko Basin and give the company greater operatorship and capital control.

“The properties to be acquired create visibility into decades of development growth and closely overlap FourPoint’s current acreage footprint,” Solich said. “By optimizing our position, we enhance optionality in drilling inventory allowing us to target the best upside locations that achieve the most economic rates of return,” he added.

“As the markets continue to remain volatile, acquiring an attractive producing asset that will significantly increase our current asset base while providing a stable cash flow profile should give FourPoint the financial flexibility to modify and adapt our development plan,” said Tad Herz, FourPoint executive vice president and CFO.

FourPoint’s previous disclosed location was also a purchase of Chesapeake assets in the Anadarko Basin, including about 1,500 producing wells.

At the time, the deal, valued at $840 million, was the largest disclosed transaction by a private independent E&P in 2015.

The acquisition consisted of more than a quarter-million acres primarily in the Cleveland, Tonkawa and Marmaton formations in Roger Mills and Ellis counties, Okla.

Jefferies LLC is financial advisor and Andrews Kurth LLP is legal advisor to FourPoint Energy. Closing is expected April 29.

WPX TURNS PICEANCE DEAL WITH TERRA

In the worst downturn in decades, WPX Energy Inc. keeps finding a way to make plays—a good sign for other E&Ps hoping to move assets. WPX said Feb. 9 that it would deal its Colorado Piceance assets to private equity-backed Terra Energy Partners LLC for $910 million.

The acquired assets consist of an approximate 200,000-net-acre position with recent net production of approximately 500 MMcfe/d. The assets also include deep rights across approximately 150,000 net acres prospective for the emerging horizontal Mancos-Niobrara play.

Founded in 2015, Houston-based Terra Energy is led by Michael S. Land, former president of the Permian and Midcontinent business units at Occidental Petroleum Corp. Terra is a portfolio company of Kayne Anderson and Warburg Pincus and is backed by an $800 million equity commitment to pursue its strategy.

“The Piceance Basin is an area that we know well and one that we believe offers considerable upside potential through focused management,” said Land.

Terra secured an increased equity commitment from its investor Kayne Private Energy Income Fund LP along with an equity commitment from affiliates of new investor Warburg Pincus LLC. Kayne and Warburg Pincus are equal partners in the commitment.

In less than six months, WPX has turned more than $4.2 billion worth of deals, starting with the $2.75 billion acquisition of RKI Exploration & Production LLC’s Permian holdings. The sale easily exceeded the company’s 2016 goal of up to $450 million in divestitures. For WPX, as transactions close, proceeds should help ease concerns over the company’s leverage and motivate investors.

WPX said it has a variety of options for the Piceance proceeds beyond paying debt, including additional drilling, infrastructure investments to its Permian gathering system and buying out of any retained transportation obligations, including obligations associated with Piceance operations.

“Our bias for action and being opportunistic won’t change,” said Rick Mun­crief, president and CEO. “We will pursue our very best investment options and continually evaluate how to optimize our assets. We’ve created a balanced portfolio with an excellent runway for sustained value generation.”

As part of the deal, Terra will assume about $100 million in transportation obligations in exchange for more than $90 million of WPX’s natural gas hedge value. WPX will retain more than $110 million in additional hedge gains.

“While the $910 million might be below some expectations of about $1 billion and represent a low multiple on production, the good news is that WPX was able to get a divestiture done in the current challenging environment for the energy sector,” said Pearce Hammond, analyst for Simmons & Co. International.

The transaction will result in an 8% reduction in 2016 EBITDA while helping the balance sheet as the company reduces its $3.4 billion debt load.

“It also aids the company’s transition to becoming a Permian and Bakken-focused producer,” Hammond said.

Credit Suisse is advisor to WPX. JP Morgan Securities LLC, along with BMO Capital Markets and Wells Fargo provided an underwritten commitment for debt financing as part of Terra’s acquisition. In addition, BMO acted as M&A advisor to Terra. DLA Piper LLP (US) and Kirkland & Ellis LLP are legal advisors to Terra and Latham & Watkins LLP is legal advisor to Warburg Pincus. Mobius Risk Group served as marketing and derivatives advisor to Terra.

PAPA'S SILVER RUN IPOs WITH $500 MILLION FOR ACQUISITIONS

Silver Run Acquisition Corp., a new U.S. investment vehicle, raised a greater-than-expected $500 million in an IPO on Feb. 29 aimed at funding the acquisition of energy companies.

The shares of many energy companies have been battered in the last 18 months as an oil supply glut has weighed on their prospects. Silver Run’s IPO shows that some investors believe that the sector’s corporate valuations have reached bottom.

In the largest IPO so far this year in the U.S., Silver Run said it had priced 50 million shares at $10 each, selling 10 million more shares than it originally planned.

Silver Run is a blank-check acquisition company sponsored by energy-focused private equity firm Riverstone Holdings LLC. Such so-called special-purpose acquisition companies (SPACs) fund the equity portion of their acquisitions through stock issuance.

Silver Run will look for companies that are “fundamentally sound” but underperforming due to current commodity prices, according to its IPO prospectus.

So-called secondary market investors are already placing bets that mergers and acquisitions will pick up in the oil patch by snapping up shares sold by publicly listed energy companies that could use the money to acquire assets at a discount. Silver Run’s offering illustrates that SPACs can successfully make a similar pitch to IPO investors.

“[Secondary market] investors are participating in follow-on financings that make already strong companies stronger, enabling them to withstand even lower commodity prices or potentially even allowing them to play offense,” said Americas equity capital markets head at Bank of Montreal Michael Cippoletti.

Silver Run’s CEO, Mark Papa, is an oil and gas veteran and Riverstone partner. He has worked for 45 years in the space, 15 of which were as CEO of EOG Resources Inc., once a division of Enron. Papa shifted EOG’s focus from gas to oil and is credited with transforming EOG into one of America’s biggest oil companies.

Shares in Silver Run are listed on NASDAQ under the symbol “SRAQU.”

Deutsche Bank Securities, Citigroup and Goldman, Sachs & Co. were underwriters on the offering.