Increasing high-quality non-Permian inventory bodes well for expanding deal markets

ANDREW DITTMAR, PLS INC., HOUSTON

PLS REPORTS RISING confidence as 2017 rolls along, with the returning swagger reflected in climbing rig counts and upbeat moods at industry gatherings. The evidence is also reflected in deal markets, where there is an increasing inventory of major packages on the market across a broad range of plays as well buying reaching even into the international arena.

Domestically, the Permian refuses to yield center stage and again notched the largest recent deal. Culminating a remarkable story, entrepreneurs Cody Campbell and John Sellers sold their company, Double Eagle Energy Permian, to Parsley Energy for $2.8 billion. The sale came just a few months after the two merged their company with Veritas Energy, helmed by Hollis Sullivan, in a move that seemed to set the stage for an eventual IPO. The offer from Parsley, at an adjusted $36,500/acre, proved too good to pass up, and the sellers retained upside exposure by taking half of the deal value in stock, effectively giving a nice payday plus a 16% ownership in Parsley. The sale is the largest deal in the Midland Basin since Athlon Energy sold to Encana for $7.1 billion just prior to the oil price crash in 2014 at $34,000/acre.

Another top-tier private operator, Jagged Peak Energy, did opt for the public market route in the first upstream IPO of 2017. Priced at $15 per share, Jagged Peak raised $545.1 million for a 17% interest in the company. The acreage is primarily in Reeves and Ward counties along the Pecos River.

Further to the southeast in Pecos County, Halcón Resources made its entrance into the Southern Delaware by acquiring assets from Samson Exploration for $705 million. Only a few months out of bankruptcy, the company has opened a new core area covering nearly 21,000 net acres with production of 2,600 boe/d. The acquisition is being largely funded through the sale of Halcón's Eastern Eagle Ford assets to Hawkwood Energy for $500 million.

Public companies pivoting focus to the Permian and shedding assets elsewhere have emerged as a key driver of deal markets, with the asset sales supplementing the usual overnight equity raise. The non-Permian assets of many of these buyers are in turn picked up by private operators, priced out of Permian bidding wars, and pure-play E&Ps focused outside of the Permian.

The Permian pivot role model is SM Energy, which made two big Midland Basin acquisitions and sold Eagle Ford and Bakken interests. SM is planning to further sell down its non-Permian assets and has engaged Tudor, Pickering, Holt & Co. to run a process for Bakken assets that produce 10,700 boe/d. Other notable E&Ps have placed large packages in the Barnett, Eagle Ford, Piceance and San Juan basins on the market. PLS expects just four of the largest packages actively being marketed to bring in a combined $2.5 billion or more. The quality and depth of assets being marketed is a stamp of confidence for deal markets from top companies and bodes well for non-Permian deal flow.

Of course the Permian itself remains the most desirable buying destination for a large portion of capital that is hunting assets. There are still substantial asset packages available there, albeit often in less-proven areas of the basin. Buyers increasingly will have to take chances pushing the productive edges of the Midland and Delaware Basins outward. There is also increasing interest in other portions of the Permian like the Eastern Shelf and Central Basin Platform. Currently, large asset packages are on the market in both these areas.

Internationally, the North Sea has staged a remarkable comeback for a region that went quiet during the gloomiest period of the oil price downturn. With private equity backing from EIG Global Partners, Chrysaor Holdings picked up a company-making asset package from Shell in the UK North Sea for $3.0 billion upfront plus future contingent payments linked to oil prices. Delek Group set itself up to plow more capital into the North Sea by making a $1.0 billion cash offer for the remaining 80% of Ithaca Energy it does not already own. Ithaca is also focused on the UK sector of the North Sea with production of nearly 10,000 boe/d. Finally, Kufpec further diversified its supply by making a $300 million buy from Total in the Norwegian sector of the North Sea.

Midstream deals have followed upstream action into the Delaware Basin. Buyers include Plains All American and Noble Midstream, which teamed up to acquire a 70-mile, 16-inch pipeline (150,000 bbl/d capacity) running from Reeves to Crane County, Texas, for $133 million. Prior to that, PAA paid $1.2 billion for the Alpha Crude Connector (a JV of Concho Resources and Frontier Midstream with assets concentrated in the NM portion of the Delaware Basin), which represented step-change growth for PAA in the region. Sellers are midstream companies, private equity-backed startups and upstream companies like Concho looking to raise more capital to fund expanded drilling plans.