Just when you thought it was safe to think A&D trends were heading up and to the right, oil prices slipped off the rails. Com­modity prices rose steadily through the first half but as the third quarter began, WTI fell below $40 for a short time after flirting with $50 a few weeks earlier. U.S. crude invento­ries were still trending well above their five-year average.

Despite this volatility, and based on sec­ond-quarter commentary, most E&P companies and A&D specialists think the industry’s recov­ery is underway, and therefore rig counts, drill­ing budgets and A&D deal flow are picking up. Buyers seem ready to test the market after a slow first quarter, so in-bound inquiries have phones ringing more frequently.

More assets are “on the bubble” as possible sales targets, said Ron Barnes, who has returned to the Oil & Gas Asset Clearinghouse as pres­ident after a hiatus. “A lot of assets are quietly being teed up, but are companies going to sell high-value assets to generate cash flow into an uncertain oil and gas price environment, or try to clean up the portfolio by selling lower-value ones? We’re talking about potential sales from A to Z and everything in between.”

Barnes likened decision-making in the A&D world to walking in a maze. “You’re walking through it blindfolded: You know where you just were but aren’t sure where you’re going next or what’s around the corner.”

Finding direction is difficult in a changed world—historically, most private-equity-backed E&Ps had a similar game plan: buy, exploit and flip assets. Today’s business models are more diverse—although buying or selling assets is always on the menu. Variables such as oil and gas prices, drilling efficiencies and what’s hot at the moment come into play.

“While it is tough to predict whether we are in recovery mode just yet, I think A&D sentiment has definitely improved,” said Joe Small, manag­ing director of CIBC Griffis & Small.

A private-equity-backed E&P CEO who has bought, built and sold for years, but who wishes to be anonymous, said he’s made a few offers this year, but as oil prices rose from their February nadir, seller and buyer expectations became more aggressive. “We’ve come back off the lows, but the sellers are not overly excited by $45,” he said. “I do feel people are more willing to talk, but we really haven’t seen a solid three, four months of price stability in order to close a deal.”

Deal facilitators agree. “Oil is not helping,” said Craig Lande, managing director at RBC Capital Markets. “Even though oil has been volatile again recently, I think sentiment is quite strong. A lot of good assets are still com­ing to market in the Scoop/Stack and Permian Basin. Demand for core assets in these areas should remain strong given the strong sin­gle-well returns at the current strip.”

Experts anticipate deal flow will pick up through second-half 2016 if capital markets remain open as they have been for the publics, and oil prices remain positive or stable. “That’s a lot of big ifs, but there are always a lot of ifs,” Lande added. Many publics need core inven­tory and growth, so they are laser-focused on the Delaware, Midland and Scoop/Stack plays, he said.

PwC reported that second-quarter deal vol­ume rose 28% versus the first quarter, surely a good sign, with 50 deals tallied greater than $50 million. Total deal volume in the first half was about $19.6 billion versus $23 billion for all of 2015, but sentiment is improved from the dire days of 2014. Data from Raymond James and IHS Herold show that the mean price for oil-weighted assets in the first half was $24,000/acre or $29.72 per barrel of oil equivalent (boe) of reserves.

“Stabilizing commodity prices and cau­tious optimism that a recovery is within sight resulted in a narrowing of the bid-ask spread in the upstream space, which led to higher deal volume that many had been expecting for some time,” said Doug Meier, PwC’s oil and gas sec­tion deals leader, when releasing a report on first-half results.

But historical margins and multiples no lon­ger seem as relevant, said his colleague, Seenu Akunuri, U.S. oil and gas valuations leader. “It’s all about whether an asset or business can produce free cash flow and positive econom­ics at current commodity prices,” he said, “not whether they might produce free cash flow at some higher price. If and only if the margins make sense now will a deal be consummated.”

Small said after months of a relentless decline leading up to the first quarter, when oil prices fell into the low $30s, a number of buyers remained paralyzed. “While they were interested in the assets, they did not want to submit an offer. They were convinced that the best decision was to not do anything.

“If fact, when we told a bidder in one of our sales processes back in January that they were not competitive, they sighed and replied, ‘I was just as scared you were going to tell me I won as that I lost.’”

Corporate mergers have been scarce year-to-date.

The first half’s biggest was Devon Energy Corp.’s purchase of Felix Energy LLC for $1.9 billion, bulking up on Oklahoma’s Stack. Closing later this year is Range Resources Corp.’s buy of Memorial Resource Develop­ment Corp. for $4.4 billion, stepping out from its Marcellus-Utica stronghold to build a core in Louisiana’s Terryville (Cotton Valley) area.

Small said the average valuation production multiple has been pretty steady in higher PDP divestments with limited economic upside, but “with the stabilization in gas prices, we expect the gas-heavy assets to start to get higher valuations.” He thinks the bid-ask spread for publicly held assets has come in line, partly because public companies have different motives for divesting than private ones do, such as closing a district office while chopping overhead.

“While price is important, it is not the only reason they transact,” he said.

Meanwhile, many public companies are thinking like Mae West, who said too much of a good thing, is a good thing—they’re bolt­ing on to beef up their core positions. Pioneer Natural Resources Co., Parsley Energy Inc., Callon Petroleum Co., SM Energy Co. and Energen Corp., for example, have bulked up their Permian Basin holdings. Appalachian player Antero Resources Corp. acquired two more asset packages in West Virginia. Many of these deals will facilitate drilling longer lateral wells through contiguous lease lines. In every basin, horizontal legs are surpassing 7,000 feet and reaching 10,000 feet, some­times beyond.

Private buyers rule

It is the private E&Ps backed by the big pri­vate equity firms that have dominated the A&D universe this year, as they typically buy in times of volatility or downturns. The sellers are pub­lics that are applauded for ditching noncore assets and for making small bolt-ons to their existing positions. According to the A&D trans­actions database at OilandGasInvestor.com, of the top 35 largest deals by dollar value in first-half 2016, some 27 of the buyers were private and eight were public. (Callon and Parsley did two deals each.) The largest private buyer was Terra Energy Partners LLC, which bought WPX Energy Inc.’s Piceance Basin assets. The larg­est domestic deal announced by a public was Devon Energy’s acquisition of Felix Energy LLC in the Scoop/Stack.

Public buyers that have accessed the capital markets are willing to pay up for assets in the core of the core, if they have a line of sight to more drilling and downspacing opportuni­ties, Lande said. “De-risked assets with proven zones have pretty low discount rates and are being valued very highly. A lot of these assets don’t have much PDP, or the PDP is fairly recent.”

EnergyNet has sold 450-odd packages year-to-date and the sellers were mostly healthy, said president Chris Atherton. “It’s been larger com­panies selling their noncore assets, not a distress thing. It is portfolio rationalization. We keep hearing a lot about distressed sales, but those companies aren’t necessarily selling. They want that cash flow while they are restructuring, or if they’ve come out of bankruptcy, the new equity holders want to wait and see if the asset values go up before selling.”

For sale

Acquisitions will accelerate in the fourth quarter with most of the announced deals coming through next year, according to EY’s Andy Brogan, global oil and gas transaction leader. About 2,000 energy assets are available globally, and buyers and sellers are gaining confidence as price expectations “coalesce,” he told Bloomberg in late July. If higher oil prices do stick for a few months, con­fidence will rise. The market should see buyers move quickly on assets they’ve been eyeing for a while, while sellers should be motivated at last, realizing better price metrics than were offered at the low point earlier this year.

The list of possible deals is long, experts say, with Permian and Scoop/Stack acreage con­tinuing to be the highest on buy­ers’ wish lists. One of the hottest A&D areas could be the south­ern Eagle Ford Shale, said Neil Dingmann of SunTrust Robinson Humphrey. “Most recently we have seen private sponsor EnerVest Ltd. agree to acquire assets from BlackBrush Oil and Gas LP along with GulfTex Energy LLC for over $56,000/acre. Based on commentary from pub­lic and private management teams, we believe that activity volume as well as price could increase in the coming months.”

Meanwhile, deals in the Permian Basin and Scoop/Stack areas have dominated the action so far.

“A small geographic area is getting all the attention, but if oil goes back up … more areas will pop up on the radar, and we’ll get back to a seven-play market,” said Mark Sooby, man­aging director, Bank of America Merrill Lynch.

Who are likely sellers? Most E&Ps continue to trim their portfolios by offering noncore assets. Chesapeake Energy Corp. reportedly may sell its Haynesville assets for more than $1 billion. Anadarko Petroleum Corp. could sell another $500 million against nearly $2 bil­lion already sold this year, with dry-gas assets likely, analysts say. EP Energy Corp. may sell some East Texas and Permian assets as it con­tinues to repair its balance sheet.

Wunderlich Securities analyst Irene Haas thinks Matador Resources Co. has a track record of selling assets at the peak. “To fund future developments, under the right con­ditions, the company is willing to part with its Eagle Ford assets, the gathering system in Loving County and midstream assets at Rustler Breaks [the latter two in the hot Dela­ware Basin].”

Buyers large and small are lining up now, thinking the worst is past and deal flow can ride the roller coaster up again. “I think there is still some good value out there that’s maybe a little under the radar,” said one private E&P, a serial acquirer, that is on the hunt. “A lot of assets had a shine to them five years ago, but in the rush to the Permian and Scoop, they kind of fell by the wayside. If you apply new technolo­gies to them now and don’t over pay, you could have some good opportunities.

“I can make money at $45—yes, I could make more at $80, but then again, I’d have to pay more for an asset at that price. So I feel good about where we are.”