Faced with dwindling cash and anxious lenders pushed to the brink, oil and gas exploration companies have reluctantly started to let go of acreage they have guarded through the worst of the commodity downturn.
The number of transactions for shale assets has increased this year, albeit off of low levels in 2015. For that shaky trend to solidify this year, dealmakers are hoping for not only higher oil and gas prices but, more importantly, sustained pricing levels that provide both buyer and seller comfort. Oil prices had flirted with and recently topped $50 per barrel, and while up 60% since February, lenders to exploration and production companies have retrenched, cutting off access to borrowing and forcing their clients to sell.
As of April, there were 49 asset transactions, excluding corporate mergers, for $12.7 billion, up from the 35 acreage deals worth $6.5 billion during the same time last year, according to IHS Energy, a global research and consultancy firm. And while an improvement, the recent uptick in merger and acquisition activity is well below the spring of 2014, which saw $40.2 billion in deals ahead of oil’s historic crash.
“Sellers are beginning to say, ‘You know what, I have to have liquidity; I have to have money or else my business goes down the toilet,’” said Darren Barbee, senior editor of Oil and Gas Investor magazine.
Distressed operators desperate for sale proceeds to boost liquidity and pay down debt are more willing to strike deals with private-equity-backed buyers, who have raised billions in recent years to snap up oil and gas portfolios at a discount. Investors have been waiting for the merger and acquisition market to pick up. Last year, deals stalled due to insurmountable expectations on pricing, mainly because sellers were reluctant to divest valuable acreage at the bottom of a market.
image001“The buy side is coming to the table,” Mark Paull, vice president of Goldman Sachs global natural resources group, told a Hart Energy conference last October.
 
 
 
Today, many upstream companies have exhausted their options to cut expenses as a way to avoid selling assets, slashing capital expenditure budgets, shedding employees, and, in some cases, halting drilling operations completely. Skittish lenders have also helped encourage management to raise funds through sales by cutting the amount available their clients are allowed to draw from their revolving credit facilities.
“For a long time, you had sellers reluctant to capitulate at what they saw were very depressed prices,” said James “J.J.” McAnelly, partner and co-head of oil and gas for Bracewell in Houston. “Now, you’re seeing more forced situations, where banks are forcing them to the table.”
The combination of severe borrowing cuts and rising oil prices has dealmakers encouraged that more transactions will come through. Last year, the deal flow fell off, with only 170 sales, a 50% drop-off from the frothy market in 2014, according to IHS. If the price of crude oil can reach – and, more importantly, remain at – the $50 barrel level, then “you will see a narrowing of” the bid-ask spread that kept the two sides apart, according to Christopher Sheehan, director of transaction research for IHS Energy.
“We think a sustainable recovery in asset deal activity will be dependent on the affirming of oil prices at $50 a barrel,” Sheehan said.
Some of the most recent deals include Oklahoma-based WPX Energy selling its presence in Colorado’s Piceance Basin to private-equity-backed Terra Energy Partners for $910 million in early April. The oil and natural gas producer said the divestiture will help the company focus on its Permian basin production while also enhancing its liquidity.
Natural gas giant Chesapeake Energy, which is facing an overleveraged balance sheet and near-term debt maturities, continues to shed assets, announcing in May that it executed a sale of a portion of its STACK acreage in Oklahoma for $470 million to Newfield Exploration. Management continues to look for additional opportunities, as it seeks to sell up to $1 billion in non-core assets this year.
And while not a traditional acquisition and divestiture transaction, Whiting Petroleum entered into joint venture agreement in which an undisclosed third party will provide Whiting with $30.7 million in exchange for a 50% working interest in 44 of Whiting’s wells in the Williston Basin. Seen as a “survival tactic,” the move allows Whiting to keep operating in the hope that commodity prices recover.
Still, not all deals are made equal and success will depend largely on the quality and location of the shale, with sellers still seeking a premium for land inside core drilling areas. Specifically, the Permian Basin in western Texas still garners the most attention as the most efficient place to drill. The shale’s low-cost breakeven and abundant access to pipeline infrastructure is reason for the upmarket zip code there.
“Given the capital chasing acreage in the Permian, property values remain high,” said Timothy Leach, chief executive of Concho Resources, during its fourth-quarter earnings call in February.