ANDREW DITTMAR, PLS INC., HOUSTON
LAST MONTH'S DEAL MONITOR discussed the E&P industry's search for the next shale play ripe for deals to take off now that Permian buying has finally cooled and noted how surprising it was that no buyers had publicly revealed a STACK, SCOOP, or Merge deal with a disclosed value over $100 million. One month later things have dramatically changed with the news that Silver Run Acquisition II is merging with Alta Mesa and Kingfisher Midstream to form a new STACK pure-play. The deal is valued at $3.8 billion, including the rollover of around $2 billion in seller equity.
Silver Run II is investing the $1.0 billion in cash it raised as a special purpose acquisition company in March 2017. It is led by long-time industry veteran and former Anadarko chief Jim Hackett, who will take the executive chairman title following the merger. Riverstone, which hit a home run in the Delaware with Mark Papa's Silver Run I (now operating as Centennial), is again providing substantial financial support. Silver Run II will take the Alta Mesa name once the merger closes and Alta Mesa's senior team will largely stay in place, including Hal Chappell as CEO and president. The deal is also a win for Bayou City Energy Management and HPS Investment Partners. Both provided financial support to Alta Mesa during a critical period of growth in the STACK.
Since first investing in the Sooner Trend in 1991, Alta Mesa has built a 120,000 net acre position in the area, mostly in the normally pressured oil window of the STACK in northeast Kingfisher County. In a joint presentation, the companies report ed that the area may have the lowest breakeven point in North American shale at $24.40/bbl-below even core Wolfcamp A&B in the Midland Basin ($27.20/bbl) and core Wolfcamp A in the Delaware Basin ($27.50/bbl). The deal values the leasehold at $14,500/acre, one-half to one-third the cost of core Permian land.
Other portions of the STACK/SCOOP are no slouches when it comes to breakevens, with the over pressured STACK (located to the south of Alta Mesa's leasehold in Kingfisher, Blaine, and Canadian counties) reported at $27.70/bbl and the SCOOP condensate in line with Karnes Trough Eagle Ford at $34.70/bbl. While reported breakevens and the ranking of various plays will vary by operator, it is clear that the STACK/SCOOP plus the newer Merge have tremendous potential.
Private equity firms have already recognized the STACK and patiently built out positions. While the Silver Run II/Alta Mesa merger is the first big STACK deal with a disclosed value in 2017, there had already been several substantial deals between private operators. Apollo-backed Chisholm Oil & Gas bought 53,000 acres and 3,000 boe/d in and around Kingfisher County. Vitruvian Exploration, which had already sold a SCOOP package to Gulfport for $1.9 billion in 2016 for a record setting $28,000/acre, sold a package in the STACK to another private equity-backed firm.
If there is a favorable market reaction to the Alta Mesa deal, more of these private equity portfolio companies are likely to move to market, either through IPOs or sales to publicly traded firms. Still, there are several challenges the STACK/SCOOP face in reaching a Permian-like land rush, some of which were absent from the boom that took hold last year. Compared to the Delaware and Midland basins, the STACK/SCOOP cover relatively small geographic footprints with correspondingly small sweet spots. And while there are as many as 10 horizontal targets identified in the play by operators, many still need to be proved as commercially viable resource plays.
Finally, the biggest challenge to another rush of deals may not be geology, but capital. A key component of the Permian buying boom was the willingness of investors to support acquisitions via overnight equity raises. However, market appetite for these has tapered off considerably. According to PLS data, there have been only $1.6 billion in E&P secondary offerings on Wall Street since the end of Q1, well below the pace in 2016 when equity secondary offerings clocked in at $30 billion.
In addition, would-be STACK buyers looking for financing will be competing with the established Permian operators now in need of capital to drill up their locations. From January 2016 through August 2017, PLS data shows companies spent $40 billion on land and reported purchasing over 25,000 net locations. Assuming an average D&C cost per well of $7.2 million, that will require nearly $200 billion to develop. Some will be funded internally, but so far, the shale industry has depended considerably on outside funding to fuel ambitious growth.
Midstream service providers are also keen to take advantage of growing volumes in the STACK with or without a corresponding boom in deals. Silver Run II secured its midstream capacity by rolling up Kingfisher Midstream in its deal with Alta Mesa. Kingfisher Midstream has over 300 miles of pipelines along with 60 MMcf/d of current processing capacity (more on the way) and 300,000 dedicated acres.
