Selling Gas

Much has been written about how dry-gas-property divestitures screeched to a halt in first-quarter 2012, and that property sales with significant gas production had to be liquids-rich to work. That’s not necessarily so.>

While no one wants to give away upside in proved undeveloped locations (PUDs), gas-property sellers can be successful when they agree to get creative and have long-lived reserves with held-by-production (HBP) upside.

Some are able to sell their proved developed producing (PDP) gas assets in the range of PV 8% to 10%, which equates to $6,000 to as low as $4,000 per thousand cubic feet equivalent (Mcfe) in this environment, and then push proven undeveloped returns into the future by retaining a convertible or back-in interest in their PUDs.

This approach aligns buyer and seller objectives, because it raises cash for the seller and alleviates PUD risk for the buyer by allowing time for natural gas prices to recover.

EnergyNet’s auction buyers were strongly acquisitive in the first quarter of 2011 with natural gas in the range of $3 to $4 per thousand cubic feet. They were less so in January and February of this year, with gas at $2 to $3 per Mcf. In March 2012, however, as gas prices continued to plunge, buyers came back as strong as in the first quarter, year over year. Buyers saw little downside commodity price risk with gas in the low-$2-per-Mcf range.

These comparisons are reflected in the accompanying charts showing Energy-Net’s participation ratios (PR). The PR is arrived at by dividing the number of due diligence viewers by the number of resulting bidders (x 1,000).

For example, in March 2012, 14 bidders resulted from 184 viewers on average per gas lot sold, yielding a PR of 76. This compares to the February PR of just 39.8, when just nine bidders resulted from 226 viewers on average per lot. So, fewer actual bidders participated per lot until gas transitioned to what bidders began to perceive as a floor of around $2 per Mcf.

Working interest multiple metrics, for all producing properties, followed gas prices down to their lowest point in 12 months, at 36 months times the average six months preceding cash flow in March 2012. Flowing barrel metrics remained in the range of $80,000 to $120,000 per barrel of oil equivalent (BOE) per day for the period of April 2011 through March 2012.

Royalty/overriding royalty interest multiple metrics, for all producing properties, moved higher in first-quarter 2012 as gas prices went lower, ending the 12-month study period at 91 months times the average six months preceding cash flow. Meanwhile, flowing barrel metrics remained in the range of $200,000 to $262,000 per BOE per day for the period of April 2011 through March 2012. All metrics presented are at a 20:1 gas-to-oil ratio.

The “sell in 2012” sentiment, to avoid rising capital gains taxes, is gaining momentum, as it did three years ago. Sellers are gearing up to divest during the second half of this year to avoid rising capital gains tax rates. This will bring significant properties to market, including gas properties. That, coupled with sellers facing up to the bleak evidence that sub-$3 gas prices are here for at least the rest of 2012, ensures properties will come to market.

Buyers are extremely eager to scoop up dry-gas properties. They see the downside price risk as minimal and the buying opportunity as both colossal and transitory

—Bill Britain, president and chief executive, EnergyNet Inc., 806-242-1509