After rough and tumble year, A&D players hard at work in portfolio shuffle
DAVID MICHAEL COHEN, PLS INC., HOUSTON
OIL PRICES are nearly a year and a half into the down cycle, the seventh since 1986 and already twice as long as the average. It's been a tough period for public US E&P companies, the top 75 of which lost 40% of their equity value and added 23% to their debt during the year ending September 1, according to TPH analysis. Despite a wait-and-see attitude by sellers, which for much of this year held out for a V-shaped rebound, this prolonged cycle is turning the table in favor of buyers.
To illustrate, for about half the 29 US upstream deals announced since July 1 exceeding $100 million, PLS's proprietary analysis attributes all the value to existing production and reserves, often leaving substantial acreage positions as lagniappe, providing buyers significant upside once prices turn north. This is a vast change from the blow-and-go days of the previous five years when acreage was the name of the game.
The hottest play today is the Permian, where even at today's prices turning to the right still makes money. PLS analysis shows Permian acreage still commanding an average of ~$15,000/acre with a high-water mark of $34,800/acre-RSP Permian's $274 million Midland Basin bolt-on in August. More recently, EOG Resources paid ~$13,000/acre (after adjusting for production value) in a $368 million Delaware Basin bolt-on acquisition in November. The Permian is attracting Chinese attention, with real estate developer Yantai Xinchao Industry announcing a $1.3 billion acquisition from private producers Tall City Exploration and Plymouth Petroleum. Tall City broadcast back in September that it had a $750 million sale in the works. A trend over recent years has developed, with mixed results, whereby non-state-owned Chinese firms are increasingly bidding on US onshore assets. Another real estate firm, Meidu Holding, jumped into the Woodbine in 2H13, but Beijing-based Goldleaf Jewelry's takeover deal with ERG Resources in 1H14 was blocked by US regulators over security concerns.
Though the bid-ask spread in the US upstream has narrowed on an asset level, this reconciliation remains notably absent in the merger market. To illustrate, Anadarko confirmed rumors that it had been rebuffed by Apache in a takeover offer that included "a modest premium," citing little room given the valuation of Apache. At the time, Apache and Anadarko had respective market caps of $18 billion and $34 billion. Investor chatter suggests that Anadarko may have been trying to grow to head off a takeover attempt-perhaps by ExxonMobil, which has $320 billion available for deals.
In Canada, PrairieSky Royalty is charging ahead, acquiring Canadian Natural Resources' 5.4 million-acre royalty holdings for $1.35 billion. The deal follows Encana's spinoff of royalty assets into PrairieSky in 2014 and Cenovus' $2.7 billion sale of its royalty assets to the Ontario Teachers' Pension Plan this year. With these transactions, the Canadian E&P industry has monetized its three largest fee title positions. Others have taken advantage of the appetite for royalties by manufacturing gross overriding royalties (GORRs) and selling them to firms such as Freehold Royalties. Unlike fee title land, however, GORRs expire with production and don't generate leasing bonuses, so they command smaller multiples.
Midstream dealmaking is particularly active between affiliated companies, mostly asset dropdowns from C-Corps to MLPs. Bucking the trend, Targa Resources Corp. is rolling up the 91.1% equity it doesn't already own in MLP affiliate Targa Resources Partners for $10.7 billion in stock and debt. Targa expects the deal to allow 15% dividend growth in 2016 vs. the MLP's current flat distribution outlook. Targa is following a playbook written by Kinder Morgan last year when the pipeline giant made the at-the-time unprecedented move of reabsorbing its MLP offspring in a $71 billion deal, which was second in size only to the Exxon-Mobil merger ($82.3 billion) until this April's Shell-BG announcement ($81.8 billion).
Finally, in the oilfield service space, the US DOJ gave unconditional clearance to Schlumberger's $14.8 billion acquisition of Cameron. This was not unexpected as they have few overlapping services. The deal helps Schlumberger maintain a qualitative market share advantage in the new OFS landscape, particularly as Halliburton and Baker Hughes anticipate billions of dollars of divestments in order close their $31.1 billion combo.
