New Growth

While anxiously anticipated, the stats on first-half 2015 transactions for upstream U.S. asset deals confirm worst fears: total A&D value plummeted 80% compared to the same period year-over-year, according to data from transaction advisor RBC Richardson Barr. But delay the weeping and gnashing of teeth, as a host of asset packages are already entering data rooms for a competitive second half of dealmaking.

Some $6 billion in E&P asset deals—excluding corporate mergers—transacted over the first six months, compared to roughly $30 billion in first-half 2014.

The market seized up, however, when oil price freefell. That swept a host of oily asset packages to the sidelines that had been queued up for first-half sale by private equity portfolio companies, said Craig Lande, managing director at RBC Richardson Barr.

“It took all those opportunistic deals off the market had we stayed at $90 oil.”

Instead, first-half deal flow—what little there was—was dominated by public companies taking conventional gas assets to market. Combined, Ark-La-Tex and the Midcontinent conventional gas accounted for half of total deal value in the first half. “Over the past few years, public companies shifted to an oil focus, and conventional gas assets are the first to go,” Lande said. “In the current environment, those are neglected assets.”

Private equity and MLPs have been the prominent buyers of these deals.

Maybe surprisingly, though, PDP valuations for conventional gas assets remain strong, he said, trading in a $4,000 to $6,000 per flowing Mcf range, and 7x to 9x forward 12-month cash flow. On the flip side, gas PUDs garnered little value in a $2.50 to $3 gas world.

“Gas buyers are confident in the PDP and are willing to pay an aggressive low, single-digit discount—maybe PV4 to PV6, then prove up the upside and lower costs to add value. But a buyer is not going to pay for a PUD that is a 15% IRR location.”

Oil delayed

Oil deals, though, just begun transacting around May, energized by a stabilized oil price combined with dropping service costs. Linn Energy and Diamondback Energy announced recent deals in the Midland Basin, with “very strong valuations similar to valuations at $90 oil,” Lande said.

With oil relatively stabilized and the fast response of service companies adjusting costs by some 30% or more, along with improved efficiencies and better completion techniques that improve EURs, economics are preserved in the core oil basins.

“You’re looking at economics near or on par with where they were at $90 oil in the core plays. Once buyers see that, they’re comfortable again. And you still have that repeatability and the serendipity of multiple zones in the premier core plays.”

That said, metrics show buyers giving full value to PDP in the Midland Basin, for example, paying in excess of $25,000 to $30,000 per acre for assets trading there, translating into competitive buyers willing to place a PV18-25 discount on de-risked upside locations.

“There is a very strong market for core assets even at $60 oil.”

Coming to market

Lande sees a wave of core, oily asset packages coming to market at the beginning of the second half, particularly in the Delaware Basin, teeing up for a busy few months. Already, he said, RBC is seeing some 50 to 70 confidentiality agreements signed for active data rooms, of which approximately 70% are private equity buyers.

“There are so many management teams with so much private equity money behind them, and a lot don’t yet have assets.”

Likewise, those private-equity sellers bunched up from the end of last year are coming to market as well. “A lot of sellers of oily assets have been pent up for eight months. Now, they are seeing a window of opportunity, and a lot are going to market.”

Deal metrics year-over-year are essentially the same, Lande noted, but he also emphasized that the strong valuations are given to core, oil-resource acreage that has been derisked and the economics proven repeatable. Unproven, fringe acreage either will not sell or will trade at a substantial discount, he said.

RBC projects total year-end deal value to be around $15 billion to $20 billion, far short of the $50- to $60 billion each of the last several years, but an improvement to RBC’s projections earlier this year of $10- to $15 billion. Said Lande, “A lot of data rooms are starting to open. It’s happening now.”