THE TIDE on the three-year oil and gas downturn may be starting to turn, and the M&A market, slow to get rolling in the eyes of many, now seems to have gained momentum.

One main driver of M&A? Functioning capital markets, said Stephen Trauber, Vice Chairman and Global Head of Energy for Citi Investment & Corporate Banking. Trauber, who sat on a panel at the recent 2016 Deloitte Oil & Gas Conference in Houston to discuss current trends and considerations of financing and M&A in the industry, said capital is available, and it comes in various forms. While bifurcated, the "high yield market is wide open today," he said, adding that values have continued to improve.

Robert Horn, Senior Managing Director at GSO Capital Partners, also participating in the panel, agreed that capital was available, with an obvious caveat. "The first half of the year, the markets were shut. If you have the right assets and the right story, capital markets are open." Rounding out the panel was Keith Fullenweider, Partner at Vinson & Elkins LLP. All agreed: The "right assets" and those "wide open" to markets are those in the Permian, SCOOP/STACK, and Utica/Marcellus.

What assets might we see up for grabs?

As McGuire Woods outlines in an article appearing in this issue, some assets will come available as bankruptcy cases continue. As of August, 48 producers have filed bankruptcy just this year. On the flipside are investment opportunities, opportunities that, most likely, come in the form of a "363 sale" or a restructuring/reorganization.

When asked if restructuring is the new norm, Citi's Trauber said yes. "Debt investors have become more sophisticated. There's a nice recovery." If a company can restructure with good assets, returns can be generated for those that can hold on. And often, "with second and third lien," Horn pointed out, "a lot of times it's their only option to hold on. It's hard to make all of those groups happy." That said, we may simply see delay in the sale process that you'd see with 363 sales, he continued.

Fullenweider agreed. Management teams that can be reset with assets they believe in is a really promising opportunity. "Creditors don't feel like they're selling out at the bottom," he said. But 363s will still be a part of the market. "Companies are fighting hard to stay out of bankruptcies," he continued, "but there will still be asset sales." Continuing on the topic, Fullenweider pointed to the risk of insolvency in the non-363 process. "As a buyer you want the benefit of a bargain and you don't want the deal renegotiated with creditors," he said.

Outside bankruptcy, companies will continue asset base analysis, looking for ways to focus on a few core areas. Portfolios will be pruned, making it possible for others to buy in, perhaps selling to those already in certain plays. "You can now buy into the Eagle Ford and Bakken without paying much upside," noted Horn. Also, "the Haynesville is location advantaged. We may see some IPO in the next 12-18 months in the Haynesville," he said.

Consider, too, companies backed by private equity. Many "tapping out resources of private equity," may be looking to sell, said Trauber. "If they don't get the value, they'll go public."

As far as deal structures, there's a lot of creative thinking around pricing risk, said Fullenweider, who said his firm has spent a lot of time with earn-out structures. "We're still seeing interest in preferred stock structure…[we're] seeing more JV structures for M&A," he said. "Instead of biting it off themselves, companies are looking to private equity."

I reached out to private investment firm Aethon Energy to get yet another perspective. Paul Sander, COO and Partner at the firm said the deals they're seeing "are primarily driven by the strategy of larger companies selling their natural gas and conventional oil properties so they can focus on their Eagle Ford and Permian Basin positions. We're not seeing much deal flow on core acreage in those capital intensive oil plays, but there is significant traffic on more speculative positions." As a result, he said, Aethon has accumulated a platform of natural gas positions in the Haynesville and the Rockies.

Companies are also looking to structure more preferred deals, more "equity-like" deals, and drilling JVs. One additional source of equity comes in the form of opportunistic funds, said Fullenweider-a bet on a turnaround. "These rebound investments will go away, but there's a lot of dry powder available," he said.

MLPs saw a lot of activity before the downturn, and there's still opportunity for midstream to use the structure, said Fullenweider, who said Noble was a good start. "We'll see people follow," he said.

Adding to the topic, Trauber said the MLP structure will survive as its use to build out infrastructure in the US. However, "the MLP as we know it for upstream isn't going to be around much longer," he said. "If you have a long-lived, stable asset base, it's a great yield vehicle, but it will be in a different form."

M&A activity appears to be on the upswing and investors still have an appetite.

Current trends and considerations for financing and M&A

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