Buyers have upper hand in M&A market

BRIAN LIDSKY, PLS INC., HOUSTON

PLS INC.'S phones are ringing. Inbound questions fielded almost on a daily basis are along the lines of: 1) What's the value of production in X, Y, or Z? 2) Is there value in the acreage? 3)Where are the unloved assets? 4) If I sell, can I expect a valid offer? 5) Should I pay for PUDs? Clearly, in this environment, there is tremendous concern among asset owners about the viability of a sale and a large fear of getting a perceived "firesale" price. Anxiety is high with the headlines running amok about every twist and turn on the calculus and inputs of the future price path of oil and gas.

At PLS, we strive to keep proper perspective. Regarding this, I was struck by the clarity of a new statistic put out this morning by the EIA. "US crude oil production from the Lower 48 states from new wells (drilled since the start of the 2014) made up 48% of total US crude oil production in 2015, up from 22% in 2007." This is remarkable. Fresh production now accounts for more than 4 MMbo/d, or 50% of total US oil production.

PLS is tracking fracs and the amount of sand being injected across the country (by operator, by play, by area) and the data we have suggests a fairly rapid decrease in completion activity beginning near year-end 2015. While we are not oil price predictors, this data give us insight as to the sustainability of current US oil production. In addition, we always remind ourselves that in February 2016, according to the EIA, global consumption of oil and liquids was 94.17 MMbbl/d versus a global supply of 95.29 MMbbl/d - that's a mere 1.12 MMbbl/d of "glut" of just 1.2% of over-supply. This is not like the "gas bubble" of the mid 1980s and 1990s - a period when we managed just fine. It is for these reasons, we are biased to advising our clients to be buyers, now.

We also hear frustration among buyers along the lines of "I can't believe so and so paid $XX for that acreage" or "Yea, the price looks good but it's a piece of junk." People speak often of the "winner's curse".

That being said, when oil prices jump by 53% in a span of a little over 30 days (WTI spot went from $26.21 on February 11 to $40.20 on March 16) people get either buoyed or spooked, depending on whether they are selling or buying. Clearly, volatility is not a friend of the deal markets and that in large part explains the lack of big deals getting accomplished recently. Closing a deal is tough.

Indicative of the US M&A markets, a trend that has held for some time-and we expect to continue to hold-is the virtual non-existence of public companies on the buy side. As has been well-publicized by a plethora of experts, US public companies are faced with balance sheet priorities and are doing a yeoman's job, at survival, adjusting and with a view to thrive. We are in somewhat uncharted waters with the new US resource play paradigm. We know massive resources are in the ground and can be extracted, but what is the clearing price?

It is evident from the deals occurring today, there is certainly smart money on the buy side. Those with the teams, technical capabilities, and longer term vision are pulling the trigger.

In the Marcellus, Benefit Street Partners, a New-York based asset management firm with $45 billion under management, struck a heads-up joint exploration and development deal with Rex Energy - notably a departure from the DrillCo structure that we saw quite a bit of last year. This deal speaks to the top tier acreage being put to market now.

In another deal that demonstrates staying power and averaging in, FourPoint Energy paid $385 million for the remaining piece of Chesapeake's western Anadarko Basin assets. The deal more than doubles FourPoint's acreage to 884,000 net acres and follows FourPoint's buy of Chesapeake's Tonkawa, Cleveland and Marmaton production in Oklahoma for $840 million in July 2015.

Finally, in the US, another phrase comes to mind when thinking about Tug Hill's $80 million buy of Marcellus acreage from Gastar - namely buy low, sell high. In the latest deal, Tug Hill gets 47 MMcfe/d of production and 37,400 net acres (21% HBP). Back in May 2011, Tug Hill and Chief Oil & Gas sold 228,000 Marcellus acres to Chevron for what is believed to be well north of $1 billion. Since the sale, Tug Hill and Chief have been staging their way back into the Marcellus beginning in late 2013.

Internationally, the story mimics the US in large part with deals on the lower end of the traditional deal size. We are not seeing much risk-taking for obvious reasons.