Upstream deal markets spring to life during busy Q2
ANDREW MASON DITTMAR AND DAVID MICHAEL COHEN, PLS INC., HOUSTON
PLS INC. REPORTS that a more hopeful outlook on oil prices and a fresh cash influx from Wall Street spurred the US upstream deal market into action during Q2, with transactions more than tripling to $16.7 billion from $5.3 billion during Q1, according to the PLS Global M&A Database. This was the strongest quarter since $27.9 billion in 4Q14, when the downturn began after Saudi Arabia blocked a production cut at an OPEC meeting. There was also strong growth in terms of the number of transactions announced, which increased 65% to 117 (including deals with no disclosed value) from 71 in Q1.
The recovery covered a broad spectrum of conventional and unconventional plays across the US with a mix of oil- and gas-focused deals. Besides the stalwart "core of the core" areas of the Permian, Eagle Ford and STACK, Q2 deals exceeding $300 million also saw assets change hands in shale plays like the Marcellus, Haynesville and DJ as well as conventional fields in East Texas, the Midcontinent and the Rockies. However, Gulf of Mexico M&A remains at a near-standstill.
After months of domination by private equity-backed buyers, acquisitions by public E&P firms rebounded strongly with Wall Street support in the form of quick equity raises. There were few corporate deals due to a perception that companies are fully priced vs. assets. However, the two largest Q2 deals were highly strategic corporate buys: Range Resources' $4.4 billion acquisition of Memorial Resource Development and Marathon Oil's $888 million acquisition of privately held PayRock Energy.
The Range/Memorial deal illustrates the focus on plays that are highly economic under current pricing. Memorial's operations lie in North Louisiana's Terryville field and focus on horizontal drilling and fracking to coax industry-leading gas rates from Cotton Valley reservoirs generally classified as conventional by peers. In the STACK, Marathon nabbed privately held PayRock, an early mover with a premier position in the oil window.
In the Permian, dealmaking remains extremely active in both the Midland and southern Delaware basins. The Midland has been a premier acquisition target for some time, with acreage valuations to match. The basin reached a highwater mark at the end of Q2 with QEP's $600 million Martin County acquisition, which according to PLS' proprietary valuation metrics came to nearly $60,000 per net acre, representing $15,000 per net effective acre based on four proven stacked benches. The southern Delaware is rapidly emerging as a premier unconventional play, particularly along the Pecos River dividing Ward and Reeves counties. Prolific Midland Basin driller Parsley Energy grabbed 10,000 net acres in this area in April for $136 million (nearly $10,000 per net surface acre). The Pecos River area is continuing to be the hottest area in the country for A&D activity in early Q3.
International deal markets also staged a recovery during Q2, albeit one that fell short of the US bounce. Deal values outside North America increased ~150% to $7.7 billion in Q2 from $3.1 billion in Q1 but still fell quite a bit short of typical quarterly totals of $15-20 billion. The Norwegian North Sea stood out as a rare bright spot with $2.3 billion of Q2 deals. Oceania clocked in with the highest deal value total at $3.9 billion. The largest deal here was the $2.2 billion buyout of Papua New Guinea explorer InterOil by Oil Search and concurrent sale in the same assets to Total for $1.7 billion. Oil Search was later outbid by ExxonMobil's $45/share offer versus $40/share making its first large corporate acquisition since its $3.2 billion Montney buy of Celtic Exploration in Canada in October 2012. ExxonMobil is the natural buyer of the PNG assets as it represents an expansion of its existing major PNG LNG project directly south of InterOil's Elk and Antelope multi-TCF gas discoveries. The interest from Total and Exxon is hardly surprising as "big oil" increasingly looks to global gas development for the future.
Oilfield service firms continue to consolidate in response to the toughest business climate seen in a generation. These firms have faced a difficult operating environment with both less work and demands for deep discounts from customers. The largest deal in this sector is the FMC and Technip "merger of equals" with the two companies taking a 50:50 interest in a new business with an enterprise value of $13 billion. With fewer overlapping business units, the firms hope to avoid the fate of the Halliburton/Baker Hughes mega-merger killed off by government antitrust regulators in May.
