Lots of talk but little action except for private equity and Canada
David Michael Cohen, PLS Inc., Houston
PLS reports that the upstream deal markets remain anemic as oil futures continue to search for a bottom. From February 17 through March 16, just five upstream transactions were announced in the US with disclosed values totaling $61 million. There are plenty of buyers in the market, as many companies have indicated their intent to take advantage of the downturn to buy more assets. However, while the oil price collapse has hurt many E&P firms' cash flow, companies still are not willing to sell at steep discounts to a longer view of oil prices - particularly for cash. The equity and debt markets are still working to keep US drillers turning to the right, albeit with significantly reduced capex budgets vs. 2014.
As an illustration, leading Bakken shale producer Whiting Petroleum on March 23 announced it will raise over $3 billion in offerings of shares and notes to address debt taken on for its $6 billion Kodiak Oil & Gas acquisition last year. The new financing puts to bed media speculation that had been circling for weeks about a potential sale of the company, despite reports that ExxonMobil, Statoil, Continental Resources and Hess were all considering bids in order to expand their Bakken positions.
On the capital side, private equity remains a force to be reckoned with, particularly in the conventional oil and gas basins. In the one US upstream deal to break the $10 million mark, Midstates Petroleum agreed to sell its last remaining legacy properties along the Gulf Coast in south Louisiana for $44 million to Pintail Oil & Gas, a portfolio company of PE firm Ridgemont Equity Partners. The purchase price was a steep discount to the $80 million Midstates would have gotten under a previous PSA with Houston-based startup Baseline Energy Resources that fell apart in December. The assets cover 12,700 net mineral acres in the DeQuincy area of Beauregard and Calcasieu parishes with YE14 production of 1,300 boe/d generated by horizontal Wilcox development.
With the exception of its undeveloped Fleetwood acreage in the same area, Midstates will now be a Mid-Continent pure-play targeting the Mississippi Lime in northern Oklahoma and the Cleveland and other stacked formations in the western Anadarko Basin. In February, Houston-based Midstates initiated a strategic alternatives process led by Evercore after seeing its stock fall to just over $1.00 from a 2014 high of $7.40/share last June.
Looking ahead, PE investor Quantum Energy Partners is working with Linn Energy to fund $1 billion for acquisitions. Linn will have the opportunity to participate with a 15% to 50% working interest as well as an opportunity to earn a promoted interest. Combined with the ability to leverage up, this commitment allows Linn to target over $2.5 billion of acquisitions. This follows a 500 million commitment to Linn by Blackstone credit platform GSO Capital Partners in January under a unique arrangement in which GSO will receive 85% WI in newly drilled wells, decreasing to 5% once the wells achieve a 15% IRR. In another positive sign from the PE markets, Natural Gas Partners is backing Bonanza Creek co-founder Michael Starzer's new venture Fifth Creek Energy Company for acquisitions in the DJ Basin, Permian and/or ArkLaTex region.
The most active area in the upstream deal market right now is Canada, where from February 17 through March 16 there were 10 transactions announced with disclosed values totaling $724 million. Standout deals include Kelt Exploration's $242 million acquisition of Artek Exploration to consolidate its position in the Inga, Fireweed and Stoddart areas of northeast British Columbia and Tourmaline Oil's $202 million purchase of Deep Basin peer Santonia Energy. Consideration in both transactions consisted entirely of stock and assumed debt, providing upside for shareholders of the acquired companies upon the recovery of oil and gas prices. In contrast with the US, low commodity prices have already dried up the capital markets for Canadian oil and gas companies, so the much anticipated process of basin consolidation is underway.
Outside of North America there were eight deal announced during the month with disclosed values totaling $512 million. The lion's share of that total came from Nigerian producer Midwestern Oil & Gas' $324 million takeout of partner Mart Resources and Swiss petrochem firm Ineos' expansion of its UK shale portfolio via a $143 million acquisition from IGas Energy. Both moves follow fiscal measures by these countries to increase industry activity: shale drilling in the case of the UK and the acquisition of oil licenses by local companies in the case of Nigeria.