Pressure builds to shed assets and fix balance sheets, while Shell/BG closing is a symbolic victory

DAVID MICHAEL COHEN, PLS INC., HOUSTON

PRESSURE CONTINUES to mount on asset owners to sell increasingly significant positions, sometimes quickly. If balance sheet woes are not manageable, bankruptcy may be the only option. While not creating an ideal transaction market, bankruptcy buys can be significant and often at good value. A case in point is Quicksilver Resources' $245 million US exit-the biggest deal yet to arise out of a bankruptcy in the current down cycle. As in previous bankruptcy-related asset sales by Swift Energy, Parallel Energy Trust, American Eagle Energy and Milagro Oil & Gas, the buyer is privately held-in this case NGP-backed BlueStone Natural Resources II. Quicksilver's Barnett assets mark the BlueStone franchise's biggest acquisition in 10 years of operation.

PLS Inc. research shows that private equity has been the overwhelming beneficiary of the down cycle, as illustrated by its buyside presence in five of the seven US upstream deals highlighted in the table below. Private equity firms have enormous war chests behind experienced management teams waiting for the right set of assets at the right price. For some, their moment has arrived.

A case in point is Terra Energy Partners, an ex-Occidental team led by Michael Land, former Oxy Midcontinent and Permian chief. Terra launched in Houston last June and built up an $800 million equity commitment from Kayne Anderson and Warburg Pincus. Its patience paid off in February when it struck a $910 million deal for WPX Energy's Piceance Basin gas assets. The acquired assets include 200,000 net acres mostly targeting the emerging horizontal Mancos/Niobrara dry gas play and 3Q15 net production of 569 MMcfe/d. For WPX, the deal crosses off a major divestment goal since the $2.75 billion acquisition of Permian driller RKI E&P.

On the sell side, the same market pressure that has already led to about 40 US bankruptcies so far is now affecting bigger industry players with large debt loads. These concerns took center stage in late January and February when SandRidge, Linn Energy and Ultra Petroleum all announced they were exploring strategic alternatives and rumors surfaced of a possible Chesapeake restructuring. These four companies each took a big stock hit on the news-in fact, both Linn and Chesapeake saw more than half their market value disappear overnight. Linn took on heavy debt at the height of the market to buy Berry Petroleum for $4.9 billion in late 2013, and its total debt now has a face value of nearly $10 billion vs. a current market cap around $150 million. As for Chesapeake, following media reports that it had asked long-time legal advisers at Kirkland & Ellis to look at restructuring options, it now has a $1.75 billion market cap vs. more than $11 billion in face value debt.

In the international space, more noteworthy than deals taking place is the number of deals falling through. In just the past few weeks, these have include Noreco's planned sale of its Norwegian assets (narrowly blocked by bondholders), Bowleven's Tanzanian acquisition from Aminex (canceled over failure to agree on a forward work program) and Shell's sale of Bijupirá and Salema fields offshore Brazil to local E&P firm PetroRio (canceled by the seller as it refocuses on growth in that country). These examples follow other recent high-profile deal cancellations, some of which are now being renegotiated such as Midwestern Oil & Gas' attempted acquisition of Nigeria partner Mart Resources. The markets have also been nervous about the lack of information in year-end reports regarding two significant African deals announced last year: Cobalt International Energy's sale of Angolan assets to Sonangol and Kosmos Energy's farm-out to Chevron at its Tortue discovery in Mauritania.

Amid so much uncertainty, perhaps the most important news in the international space is the closing of Shell's acquisition of BG-the biggest oil and gas deal in more than a decade. Having overcome multiple regulatory and investor hurdles over the past 10 months, this closing sends a powerful message to the markets that big, complex deals can be brought to fruition even in a difficult oil price environment. More directly, it will spur additional deal activity as Shell works through its $30 billion divestment goal for 2016-2018-a process already underway with small asset sales executed such as the non-operated Maclure oil and gas field in the UK North Sea and refining interests in Malaysia.

The supermajor is also still active on the buyside, agreeing to acquire the interests of partner Petromanas Energy in an Albanian JV formed in 2012 for $45 million. As shown by this deal, just because Shell has a lot of divestments ahead doesn't mean it will shy away from opportunistic acquisitions. On a larger scale, Shell is pushing to loosen Brazilian rules requiring state-owned Petrobras to operate and hold at least 30% in all new pre-salt projects. Now the country's biggest foreign producer after the BG deal, Shell is in a better position than any other company to benefit from such a scenario.