I Squared Partner: San Juan Gathering Sale The Plan All Along

Fresh off buying WPX Energy Inc.’s San Juan Basin gathering system, buyer I Squared Capital said April 14 it sold a 28% stake in the oil, gas and water gathering system to GE Energy Financial Services.
Adil Rahmathulla, partner at I Squared Capital, told Oil and Gas Investor that was the plan all along—to sell a stake to a financial partner that could continue to grow the company and inject capital as the system expands.
I Squared’s new company, Cube Midstream, will operate and manage the new 220-mile system in New Mexico. The global infrastructure fund closed its deal with WPX on March 9 to acquire the system for $285 million.
Rahmathulla, who led the deal, said that GE’s stake was purchased on the same terms and conditions as I Squared’s, putting GE’s acquisition at roughly $80 million.

In addition to making the investment in Cube and subsidiary Whiptail Midstream LLC, GE will collaborate with I Squared Capital to invest in other near-term opportunities for oil and gas infra­structure in the basin.
“GE’s tremendous industry depth and experience make them an invaluable partner,” he said. “This transaction is an important step in the execution of our strategy to position Whiptail as the premier gathering system in the San Juan Basin.”
WPX is the main producer for the line, though a number of other producers contribute, Rahmathulla said.
I Squared, with $4 billion in assets under management, is “not only about buying large companies,” he said.
“We also buy projects … that offer the appropriate risk-adjusted return.”
As with its other holdings, management teams run I Squared’s various companies and projects.
Likewise, Cube Midstream will look to make investments in similar assets in other basins in the U.S.
“The idea would be then you would have accumulated a portfolio of gathering systems with access to different geographies and different producers,” Rahmathulla said.
Future purchases would take on the same considerations that I Squared did in buying WPX’s system.
“You have to start each situation with whether the basin itself is economic,” Rahmathulla said.
The next condition is to ensure I Squared is comfortable with the producers in a basin and their long-term cash-flow profiles.
“Finally, we’re not just buying a static business, but helping grow it organically, increasing the breadth of the operations,” he said.
With the San Juan midstream asset, I Squared saw high-quality, low-cost acreage within the upper Gallup play.
“Our gathering system is really the only gathering system,” he said.
I Squared is a 10-year fund, though on average it holds investments for six to eight years. Whether investing within the basin or outside, the fund will be around for some time to come.
“We tend to take a long-term approach to everything we do,” Rahmathulla said.
—Darren Barbee

Weld Played: Noble Energy, Synergy
Resources Deal In The D-J

FANFARE may be hard to come by in the Denver-Julesburg (D-J) Basin these days, but Noble Energy Inc. and Synergy Resources Corp. at least deserve a round of applause.
Denver’s Synergy said they have a definitive agreement to buy Noble’s oil and natural gas properties in the Greeley Crescent area of Weld County, Colo. Synergy will buy 33,100 net acres, mostly undeveloped, for $505 million—a price that is roughly half of the company’s market capitalization.


Synergy, headed by former Kodiak Oil & Gas Corp. co-founder Lynn Peterson, said that at closing, the company will have interests in about 47,200 net largely contiguous acres in its defined Wattenberg fairway area and an additional 22,000 net acres of other Wattenberg acreage.
The deal advances Noble’s liquidity position in a savvy move for land it wasn’t actively working. The sale price per acre was about $11,000 to $13,000, an analyst said.
So far in 2016, the company has inked sales worth $775 million.
Noble currently has no rigs running on the acreage but drilled 14 horizontal wells there in the past four years, said David Kistler, senior research analyst with Piper Jaffray & Co.
The divested acreage represents 8% of Noble’s D-J Basin acreage and 2% of its production.
David L. Stover, Noble Energy‘s chairman, president and CEO, said the Greeley Crescent sale signifies the company’s continued portfolio management efforts.
The transaction also highlights the strong value of undeveloped acreage throughout the D-J Basin. Kistler said the undeveloped portion of the Greeley Crescent assets was about $235 million of the total price.
“Our D-J Basin development activities are currently focused on Wells Ranch and East Pony, where we have a deep inventory of long lateral drilling opportunities in an oily part of the basin,” Stover said. “In addition, our existing infrastructure in these areas provides a competitive advantage.”
Tudor, Pickering, Holt & Co. was financial advisor to Noble Energy, which expected to close in two phases—in June and by the end of 2016.
Peterson, Synergy’s chairman and CEO, said the deal is “transformational” and a significant step forward for the company to become a leading operator in Wattenberg Field.
To finance the purchase, Synergy will sell 45 million shares of its common stock for total gross proceeds of about $261 million. The offering was expected to close on or around May 10.
Synergy doesn’t expect to increase its operation activities in 2016, but development should increase in 2017.

Callon Adds Midland Basin Acreage, Establishes New Core

Despite the tough environment for most E&Ps, one company is expanding its footprint in the heralded Permian Basin, landing a new core operating area in one of the basin’s hot spots.
Callon Petroleum Co. said on April 19 that it had entered into definitive agreements with three private entities—BSM Energy LP, Crux Energy LP and Zaniah Energy LP, collectively operated by Big Star Oil & Gas LLC—to acquire Midland Basin acreage in Howard County, Texas.
The acquisition will cost Callon, based in Natchez, Miss., $221 million in cash and 9.3 million shares of its common stock. Based on the April 18 closing price of Callon’s stock, total consideration amounts to about $301 million, according to a recent investor presentation.
Separately, Callon entered into joint development agreements involving its Midland Basin acreage in Reagan County, Texas, with privately held, Houston-based TRP Energy LLC, for net $33 million in cash. The joint deal involves a 55% interest to Callon in 4,745 acres from a private seller.
The transactions are set to boost Callon’s position in the Midland Basin to about 34,000 net surface acres. Included are more than 30,000 net surface acres in core areas of the Midland Basin that have been de-risked for multizone horizontal development, according to the release.
In Howard County, Callon is acquiring about 17,298 gross (14,089 net) surface acres. The company will also gain additional acreage in Martin, Borden and Dawson counties, Texas.
Upon closing, Callon will assume operatorship of more than 80% of the assets. The company will also own an estimated 81% average working interest with 61% average net revenue interest in the assets.


The company expects any near-term increase in operational activity following the acquisitions to be limited in 2016.
Callon said it entered agreements on April 15 to buy and sell Midland Basin acreage as part of the joint venture with TRP Energy. The company added that the maneuver is expected to increase its acreage position in western Reagan County by 1,759 net acres.
Through a joint acquisition of 4,745 net acres from a private party, Callon and TRP will establish an area of mutual interest (AMI) north of Garrison Draw Field in western Reagan County. Simultaneously, Callon will sell a 27.5% interest in Garrison Draw Field to TRP.
Following completion of the transaction, Callon will hold a 55% share in the AMI. Callon anticipates the transactions will close in second-quarter 2016. None of its transactions are contingent upon each other, according to the release.
Jefferies LLC was financial advisor to Callon in connection with its acquisition in Howard County. Scotia Waterous was advisor to Big Star. —Emily Moser

Chesapeake Resumes Stack Play Teardown With Newfield Deal

As Chesapeake Energy Corp. continues its strategic withdrawal from the Anadarko Basin, other E&Ps are reaping the benefits.

Chesapeake said May 5 it signed an agreement to sell to Newfield Exploration Co. approximately 42,000 net acres in Oklahoma’s Stack play for about $470 million. Chesapeake has divested huge areas in Oklahoma since August, largely to private companies.

Excluding proved developed producing (PDP) and reimbursement allocations, the undeveloped acreage value equates to about $10,000 per acre, according to Newfield.

Current net production from the assets is about 3,800 boe/d, of which 55% is liquids. Production is expected to more than double by year-end 2016 as recently drilled wells are completed and turned to sales.

Newfield expects to fund the transaction with cash on hand. As Newfield builds its position in the play, it estimates that its cumulative investments in Stack acreage tally less than $3,000 per acre.

In addition, Newfield has identified more than 1,000 potential drilling locations on the new acreage.

“The Stack acreage sale ... accelerates value from a portion of our undeveloped acreage that currently generates very little cash flow, giving us the ability to enhance current liquidity,” said Doug Lawler, Chesapeake’s CEO, in a statement.

The sale edges the company closer toward its target of an incremental $500 million to $1 billion of asset sales by year-end, Lawler said. The Oklahoma City-based company anticipates subsequent divestitures during the second and third quarters.

With the Newfield deal, Chesapeake has closed or signed sales agreements in 2016 worth about $1.2 billion in gross proceeds—or a net $950 million to the company. Substantially all of the company’s announced asset divestitures are expected to close by the end of the third quarter.

In April, Chesapeake peeled off more of its Oklahoma holdings, selling 12,000 net acres in the Scoop play to a Kayne Anderson-backed company for $106 million.

The expected net proceeds from deals currently closed or signed in 2016 will reduce Chesapeake’s production by about 35,000 boe/d, with nearly 60% natural gas.

Chesapeake reported a $964 million first-quarter loss, or $1.44 per fully diluted share. The primary driver of the loss was a noncash impairment of the carrying value of Chesapeake’s oil and natural gas properties of about $853 million, the company said.

The deal will expand Newfield’s footprint in the Stack play to about 265,000 net acres, including significant overlap in Kingfisher, Blaine, Dewey and Canadian counties, Okla. The Houston-based company‘s average working interest across the acreage is about 50%.

“This bolt-on acquisition is ideal for Newfield, combining strategic fit in a growing resource play where we have a clear competitive advantage,” said Lee Boothby, Newfield’s chairman, in a statement.

As the discoverer and founder of the Stack, Newfield has drilled more than a quarter of the play’s total wells and is the proven leader, Boothby noted.

“Time and again, we have demonstrated our ability to efficiently move large-scale resource plays from concept to discovery, through the HBP phase and into full-field development,” he added.

More than 90% of the acreage in its deal with Chesapeake is HBP and requires only modest capital investments over the next several years, according to the release.

Of the total consideration, about $50 million is associated with PDP reserves and reimbursement for recent Stack wells that are currently drilling or have been drilled and are planned for completion at some point.

Closing is set for the second quarter of 2016. The transaction will have an effective date of April 1. —Emily Moser

Range Resources’ Stack Sale Lets Company Coast In Debt Neutral

With its E&P peeRS buying and proving up the Stack play, Range Resources Corp. has agreed to sell part of its holdings there and wait for acreage in the northern extension of the play to prove up.

Range, based in Fort Worth, Texas, doesn’t intend to do any of the proving on its remaining acreage, however. It will wait for offset operators’ results to entice potential buyers.

The company, which delivered a strong start in first-quarter 2016, said on April 28 it agreed to sell about 9,200 net acres of scattered assets in Oklahoma. Range signed a purchase and sale agreement for proceeds of about $77 million for holdings in Kingfisher, Canadian and Blaine counties, Okla.

That’s the same area where Devon Energy Corp. increased acreage in the Woodford Shale and Meramec plays by acquiring 80,000 net acres in the Stack.

Range’s transaction was expected to close in May. Combined with its recent Marcellus sale, the company should have enough money to avoid taking on additional debt in 2016.

In March, the company closed a deal to sell a 23% average working interest in 10,900 acres in Bradford County, Pa., for about $110 million. The company retains large holdings in the Marcellus.

“With these two asset sales of about $190 million, we see no increase in absolute debt in 2016 compared to year- end 2015, based on current prices,” said Jeff Ventura, Range CEO, during an April 29 conference call.

As of January, Range subsidiary Range Production Co. LLC operated 78 Oklahoma wells in Blaine, Kingfisher and Canadian counties, according to state records. —Darren Barbee

Baker Hughes, Halliburton Face Big Bills After Merger Crumbles

Anyone sweating their monthly utility bill or car payment probably cannot even come close to identifying with Halliburton Co.
On May 4, the services giant will pay $3.5 billion to rival Baker Hughes Inc. after the two companies agreed to break off a merger agreement that was announced in November 2014.
The final stone in the deal’s sarcophagus appears to have been set in place by the U.S. Department of Justice (DOJ), which filed an antitrust lawsuit April 7. The deal, initially valued at $35 billion, is the largest in recent memory—and perhaps ever—to collapse.
The companies will now have to catch up with the industry, which has made vast changes since the merger clock started ticking.
After the federal lawsuit, which cited the deal as a potential threat to oil and gas competition, prices and innovation, was filed, few expected the transaction to continue.
Ken Sill, senior analyst at Seaport Global Securities LLC, told Oil and Gas Investor he thought the deal had a chance as Halliburton was willing to divest enough businesses, in his view.
However, after seeing the DOJ’s anti­trust suit, there appeared to be a “big political element, which I had suspected.
“Clearly the DOJ was not going to approve the merger no matter what,” he said, adding that the DOJ antitrust charge seemed uninformed. “I was stunned by the lack of knowledge shown by the DOJ’s position.”
Another factor was that Halliburton could not bring GE Oil & Gas to the table to demonstrate a legitimate buyer that could counterbalance the mass of a combined Halliburton and Baker Hughes to alleviate DOJ concerns, Sill said.
“What killed this was Halliburton couldn’t find a buyer they could put up and say would be competitive,” he said. Both companies said in a statement that they expected shareholders, customers and other stakeholders to benefit from the merger.
Dave Lesar, Halliburton chairman and CEO, said obtaining regulatory approvals and general industry conditions “severely damaged deal economics” and led to termination of the agreement.

Baker thaws
Baker Hughes said on May 2 that it will use part of its $3.5 billion breakup fee to pay debt and buy back stock.
The company intends to repurchase $1.5 billion of shares and pay down $1 billion of debt. It also plans to refine its $2.5 billion credit facility, which expires in September.
Both companies must now pick up the literal and figurative pieces of their respective empires.
However, both companies are “18 months behind the rest of the industry,” after their respective assets remained in antirust limbo worldwide, Sill said.
With $2.5 billion already spoken for, Baker Hughes is “certainly not going on a big acquisition spree,” he added.
Baker Hughes said it would immediately remove “significant costs that were retained in compliance with the former merger agreement.”
The company is also evaluating broader structural changes to further reduce costs and improve efficiency. The initial phase of the cost reduction efforts is expected to result in $500 million of annualized savings by year-end 2016, the company said.

Bank left
Halliburton’s next move may need pruning. The company is holding onto about $300 million per annum in costs due to the merger, Raymond James analyst J. Marshall Adkins said in a May 2 report.
“While the $3.5 billion termination fee would be a headwind, we note this has already been financed through the company’s recent debt offering in anticipation of the merger and would leave the company at just 27% net debt to cap,” he said.
Halliburton had raised $7.5 billion of long-term debt to fund the merger, Sill said.
While the company wanted many of the service lines Baker Hughes possesses, such as artificial lift and various drilling technologies and production chemicals, the problem is that few other public companies can offer the same product lines on a similar scale, Still said.
“I don’t think they will try to make another large acquisition,” he said. —Darren Barbee

Marathon Oil’s $870 Million Divestiture Patches Budget Holes

A quartet of deals announced by Marathon Oil Corp. on April 11—the largest with private company Merit Energy Co.—has the potential to stop Marathon’s cash-flow hemorrhaging, an estimated overspend of $1.4 billion through 2018, analysts said.

Marathon signed agreements totaling $950 million to sell its Wyoming upstream and midstream operations as well as acreage in the Piceance Basin and West Texas. The company is also selling its 10% working interest in the Gulf of Mexico’s Shenandoah discovery, which may have repercussions for Anadarko Petroleum Corp.’s 30% stake in the project.
Dallas-based Merit Energy agreed to purchase the Wyoming assets for $870 million, Marathon spokeswoman Lee Warren told Oil and Gas Investor. Marathon’s holdings include the 570-mile Red Butte pipeline and waterflood developments in the Big Horn and Wind River basins. The company reported 16,500 barrels of oil equivalent per day (boe/d) in first-quarter 2016.
While it’s difficult to calculate valuations for Marathon’s Wyoming upstream assets, it is “reasonable to assume that Marathon received between $30,000 and $40,000 per flowing barrel of production,” said Guy Baber, senior research analyst for Piper Jaffray.
The upstream assets would account for about $660 million of the $870 million price, a discount to historical transactions, he said.
The remaining value of $210 million to $370 million would pay for the Red Butte midstream asset.
Buyers for the remaining $80 million worth of transactions weren’t disclosed. If closed by mid-year 2016, as expected, the deals could help sew up a large hole in Marathon’s pocket.

MARKETPLACE CHATTER

Remodeling the den. Diamondback Energy Inc. is among a couple of companies that Topeka Capital Markets analyst Gabriele Sorbara expects to see some A&D activity from in the near term. Diamondback’s cohort, Viper Energy Partners, is also a likely buyer. Also worth noting: Newfield Exploration Co. plans to divest following its $470 million Stack deal with Chesapeake Energy Corp.

Fear trade? Scarcity fears in eme­rging plays (and easier financing) appear to be driving asset transactions, and not just in the Permian and Anadarko. Low-level asset transactions are warming up in the Utica and Marcellus. EQT Corp. bought Utica/Marcellus on May 3.
“The most active ‘horse trading’ has come in the Oklahoma Stack, but the Marcellus has had several sales announced recently, and the number of data rooms open in southwest Pennsylvania and northern West Virginia is said to be rising,” said Jonathan D. Wolff, equity analyst with Jefferies LLC.

EQT Buys Next-Door Neighbor Statoil’s Marcellus Acreage

EQT CORP. continued its Appalachian pure-play quest, buying even more Marcellus and Utica holdings in a deal for next-door neighbor Statoil’s acreage.
EQT said May 2 that it signed an agreement to buy 62,500 net acres in the Marcellus Shale for $407 million.


The assets are primarily in Wetzel, Tyler and Harrison counties, W.Va., and add to EQT’s core development area. The Wetzel addition will complement adjacent EQT operations. The deal adds production of 50 million cubic feet equivalent per day (MMcfe/d).
In line with the company’s consolidation strategy, the acquisition increases EQT’s core undeveloped Marcellus acreage by 29%. The transaction also includes drilling rights on an estimated 53,000 net acres that are undeveloped and prospective for the deep Utica.
“Management has been vocal about being on the hunt for acreage, and this transaction fits the bill with acreage offsetting its current position in Wetzel, and deep Utica rights included on 85%,” said Gordon Douthat, senior analyst with Wells Fargo Securities.
EQT launched an equity offering, later upsized, to pay for this transaction and potentially more.
The offering will generate $809 million in gross proceeds, including greenshoe, “which would more than cover the $407 million transaction price,” he said. As of March 31, EQT’s cash balance was $1.6 billion with $1.5 billion undrawn on its revolver.
“Management on numerous occasions has indicated its desire to preserve its clean balance sheet, which it views as a competitive advantage, and today’s equity offering certainly bolsters this case,” Douthat said. “We wonder if over-equitizing the transaction might potentially indicate more transactions are to follow.”
The transaction is expected to close by July 8.

A&D’s Next Secret Ingredient: The Borrowing Base Squeeze

Ever since commodity prices went south, chatter of an approaching whirlwind of deals has been constant. The pace of A&D activity remains at a crawl so far in 2016, and most wonder where the action is.

Consider this the quiet before the storm, as spring borrowing base redeterminations begin to shake things up and satisfy a growing hunger for acquisition bargains among energy executives.

An overwhelming majority of executives, 71%, indicate plans to initiate two or more M&A transactions this year, according to KPMG LLP’s 2016 M&A Outlook Survey. There won’t be any megamergers on the horizon, though, at least for U.S.-based E&Ps. Instead, most executives anticipate deals to be smaller and more strategic, the report said.

“People just don’t have a sense of how long this downturn is going to last, so I don’t think they’re inclined to spend their entire wallet on one deal,” Tony Bohnert, deal advisory partner for energy, natural resources and chemicals at KPMG, told Oil and Gas Investor.

There’s no shortage of capital for acquisitions—some $70 billion has been raised by industry players, Bohnert said. The money is earmarked specifically to pursue distressed energy assets and opportunities, and this is the source of the holdup in A&D action.

Potential buyers, including well-capitalized companies and private equity firms, are waiting for the legs of the highly leveraged to finally buckle.

“Our sense is that once redeterminations hit, and companies are put into a position where they have to pay back debt, file for Chapter 11 or go find capital, then you’re going to see a much bigger increase in the M&A activity and volume,” he said.

In the fall, banks were more merciful than most expected. Redeterminations were “pretty mild,” with reductions of around 10% to 15%.

“The feeling of everyone is that [banks] either extended or modified payment terms and covenants that allowed these companies to exist and, frankly, play for time,” he said.

The survey points to the U.S. as the most attractive destination for M&A activity. Other top investment markets include Canada and China.

Some of the interest is from “a large pool of nontraditional investors who see value in the marketplace because of the commodity price downturn—sovereign wealth funds, pension funds and foreign investors,” Bohnert said. —Emily Moser