Rising Above the Fray Series – The Market Taketh and The Market Giveth

Rising Above the Fray Series – The Market Taketh and The Market Giveth

What’s Hot, What’s Not

As Wall Street has slammed the brakes on providing funding via secondary equity offerings and public bond raises, E&Ps are increasingly switching lanes towards other strong market segments as opportune sources of capital. This article provides data and insight on the depth of the Wall Street shutdown (The Market Taketh) as well as some sweet spots for U.S. E&P operators and capital providers to tap into for opportunities (The Market Giveth) including a strong Royalty and Minerals market, a strong Midstream market and other bright spots.

From an industry, capital allocator and investors perspective, the suite of product offerings by Drillinginfo, including its Market Research, Market Intelligence, Mineral and Midstream Research offerings allow for dynamic, single-sourced, integrated quality data sets to stay ahead of the pack and quickly identify profitable opportunities in the one of largest markets in the world (energy) across the entire the energy value chain — be it above ground or below ground, across commodities, in the U.S. or international, or in the public or private markets.

The Market Taketh

Now that we are approaching the mid-year point of 2019, it is remarkable that year-to-date no U.S. operator has raised a single dollar from an equity follow-on issuance.

In fact, the last issuance occurred back on November 19, 2018 when Contango Oil & Gas raised net proceeds of $33 million via issuance of 8.6 million common shares at $4.00/share to support its southern Delaware Basin Bullseye and NE Bullseye development in Pecos County.

This blowback from Wall Street stands in stark contrast to the run and go days for investors backing U.S. public E&P land grabs during 2016 and early 2017.

From Q2 2016 through Q1 2017, equity investors were eager to back acquisitions which totaled $90 billion, of which nearly 60% or $53 billion was for land (aka drilling inventory). In 2016 alone, Wall Street investors wrote $30 billion in equity checks to the acquirors, often overnight. At the time, the open-door policy of Wall Street enabled transformative acquisitions by U.S. operators that set the stage for decades of drilling.

In a twist of irony, soon after the land grab, which by default requires enormous piles of money to drill out the inventory, Wall Street slammed the bank shut and demanded companies develop those inventories through cash flow – significantly slowing the pace of growth. To put numbers around this, at mid-2018 our data indicates that operators publicly disclosed (in their own language) buying net 50,261 drilling locations from January 1, 2016 through June 30, 2018 which would require nearly $350 billion (by Drillinginfo cost estimates) in drilling and completion capital to drill out. That’s a lot to develop out of “cash flow”!

To be sure, the shut down of easy equity has slowed the pace of U.S. resource play inventory development – which is of such scale that going full throttle would certainly have further increased global supply and pressured oil prices more than they already are.

In the past decade, annual bond raises by U.S. operators average around $30 billion. Since January 2015, U.S. operators have issued $107 billion in bonds, compared to $60 billion in equity.

Largely as a result of the equity market shutdown, the bond markets have followed suit as most companies are challenged to raise additional debt without a concomitant increase in equity. The few bonds that are getting through are largely refinances to extend maturities.
Nearing mid-year 2019, U.S. E&P operators have raised a paltry $3.2 billion in bonds thus far this year from just seven companies –

  • Apache, June 5 ($394 MM net, Unsecured Notes due 2049, 5.35% coupon)
  • Apache, June 5 ($596 MM net, Unsecured Notes due 2030, 4.25% coupon)
  • Goodrich, May 31 ($11.8 MM net, Secured Second Lien due 2020, 13.5% coupon)
  • Kosmos, April 4 ($637 MM net, Senior Notes due 2026, 7.125% coupon)
  • CNX Resources, March 14 ($490 MM net, Senior Notes due 2027, 7.25% coupon)
  • Centennial Resource, March 12 ($490 MM net, Senior Unsecured Notes due 2027, 6.875% coupon)
  • Cimarex, March 7 ($497 MM net, Unsecured Notes due 2029, 4.375% coupon)
  • PetroQuest, February 8 ($78 MM net Secured Second Lien due 2021, 10% coupon)

The Market Giveth – What’s Hot

While public investors have gone on strike funding E&P operators, one sector is gaining momentum as an alternative way to play the development of the U.S. resource plays. The mineral and royalty market set a record $3.3 billion in M&A activity in 2018.

Not only is this market active in M&A, the public markets are also pumping fresh capital into this market with the latest example being the IPO of Brigham Minerals (NYSE: MNRL, $1.0 billion market cap) which went public on April 18, 2019 via an upsized offering of 14.5 million shares priced at $18 and currently is trading north of $20. Other pure-play publicly-traded mineral and royalty companies (as of June 17) include –

  • Viper Energy Partners (NASDAQ: VENOM, $3.8B market cap, IPO June 2014)
  • Black Stone Minerals (NYSE: BSM, $3.2 B market cap, IPO April 2015)
  • Kimbell Royalty (NYSE, KRP, $1.1 B market cap, IPO Feb. 2017)
  • Falcon Minerals (NADAQ: FLMN, $0.6 B market cap, formed August 2018)
  • Dorchester Minerals (NASDAQ: DMLP, $0.6 B market cap, formed 2003)

The Grandaddy included in this sector is Texas Pacific Land Trust (NYSE: TPL), an entity created in 1888 via a reorg of the Texas and Pacific Railway that ultimately created the Trust. TPL is now one of the largest landowners in Texas holding 888,333 surface acres and 459,200 acres with a perpetual oil and gas royalty interest, much of which is in the Permian Basin. Prior to the onset of the US shale plays, this stock traded around $30/unit at the beginning of 2010. From January 1, 2010 to April 8, 2019, the stock soared to a recent peak of $901/unit. The units currently trade at ~ $715/unit and the Trust sports a market cap of $5.5 billion.

For U.S. E&P operators, a thriving mineral and royalty markets represent an opportunity to raise capital via the sale of outright minerals or carved-out royalties from high net revenue interest assets. Examples include Range Resources raising $300 million via a 1% ORRI carve out sold to Ontario Retirement Teachers Pension Plan, Continental Resources selling some Oklahoma minerals ($220 million) and forming a JV with Canada’s leading gold-focused royalty company, Franco-Nevada, and of course Diamondback Energy’s dropdowns to its affiliated company, Viper Energy. The attractiveness of this increasingly transparent market also drove Chevron to organize its U.S. minerals into an internal division so that it can take action as needed to realize the full value of these minerals which look to be undervalued under the Chevron company.

From 2015 through 2018, the U.S. Midstream deal market averaged $113 billion per year as buyers vie to capture the value from the growing midstream buildout to support surging production from the resource plays. In 2018, this activity reached a modern peak at $170 billion with U.S. E&P operators also participating with a record $12 billion of sales into this market.

Recent, notable deals by U.S. E&P operators include the remaining sale of Anadarko’s ownership in Western Gas Partners for $4.0 billion in November 2018. In August 2018, Oxy sold non-core assets to privately held Lotus Midstream and Modus Midstream $2.6 billion. That same month, Apache sold 71% of its Alpine High midstream assets in the Delaware Basin for $2.5 billion. Earlier in the year, Gulfport and EQT sold Ohio gathering assets to EQT Midstream for $1.5 billion. Mid-cap E&Ps like Oasis Petroleum, PDC and Matador have also tapped into this market as avenues to raise additional capital outside of traditional sources.

Not to be discounted, the pivot of private equity into the midstream sector is alive and well. Since 2015, we’ve tallied over $24 billion in PE commitments to midstream companies and projects. 2018 was a record year with $9.2 billion committed (compared to $5.3 billion in the upstream sector) with 2019 thus far tallying over $3.4 billion.

Aside from backing new companies, private equity is directly investing in deals themselves. Since 2015 private equity and financiers bought about 6% of the $600 billion in U.S. midstream deals. However, the role of this sector on the buyside is surging and on a record pace YTD accounting for over 40% of this year’s $29 billion in U.S. midstream deals. Two strong examples include Stonepeak Infrastructure Partners $3.6 billion buy of Oryx Midstream and a Blackstone Infrastructure led group to invest $4.8 billion into a controlling stake in Tallgrass Energy, LP. In announcing the deal, management emphasized that the fund is an open-ended fund that is “very long-tailed” and capable of financing the $4 – $5 billion of capital projects on deck at Tallgrass.

As the public markets tighten their grip on financing upstream activities, we certainly expect E&P companies to look towards selling or forming joint ventures regarding midstream assets as the buyer universe looks to be hungry to expand. A case in point is Noble Energy who in April 2019 disclosed that with the assistance of its advisors, the company is conducting a review of strategic alternatives regarding its effective 45% ownership in Noble Midstream Partners.

Fundamentally, the landscape for private equity investors in the upstream sector is changing. In recent history, there are great success stories of PE sponsors backing talented teams for new private E&Ps with a playbook to go acquire lands early, deploy the latest technology and operational best practices with an objective to de-risk the lands for a sustainable, consistent drill and develop program. The poster child of this model is the Delaware Basin where PE-backed companies deployed risk dollars and were able to exit to a public company seeking to put a solid footprint in the emerging basin. The funding by the buyers was often supported by the public equity markets with funding secured in overnight raises.

As the table below depicts, since 2015 PE-sponsors have committed over $44 billion of which roughly 11% has turned. The Permian is the largest destination representing nearly 50% of those risk dollars. PE investments recently peaked in 2017 at nearly $14 billion.

PE investments dramatically slowed in 2018 to just a little over a third of the prior and in 2019 has only tracked $1.6 billion.

While new upstream commitments have slowed, the landscape of PE investments does offer opportunity on multiple fronts. Traditionally, PE model looks to exit within 3 to 7 years so there is a host of companies that are nearing the exit timeframe and certainly present buying opportunities. It is fair to say currently, the market favors buyers who have many choices of where to deploy acquisition capital.

Also, for those looking to deploy fresh private equity, the aforementioned Wall Street negative sentiment regarding equity and bond issuances sets up alternative models. Instead of the buy, de-risk, sell model, some PE backed companies are looking to build full scale E&P companies and drill out their de-risked positions. At the well level, even in today’s price environment there are attractive IRRs that PE backed companies can achieve – given access to additional drilling and completion capital. This capital may take the form of direct equity or alternative structures including non-op commitments, drillco commitments or joint ventures.

For those who look long term, there is also an opportunity in this market to deploy capital towards PDP production valued at current commodity prices. The lagniappe pie associated with PDP buys is increasing as the public markets continue to change the valuation metrics for public E&Ps.

Much has been written regarding the Drillco model. In short, the structure provides for a win/win between a capital provider seeking to invest in low risk wells and an E&P company seeking to accelerate the development of long-dated inventory. An example of the structure is shown to the right.

In simple terms, the operator wins once the capital provider achieves a certain rate of return via a flip of the share of the cash flow generally after the peak production from the well. The capital provider wins by achieving minimum required rates of returns and is rewarded with a tail of cash flow through the life of the well.

Given that many E&P companies have decades worth of de-risked inventory and limited capital sources, Drillco’s are an attractive model to supplement basic capital programs with additional drilling and cash flow.

The types of capital providers reach from typical PE firms to capital firms targeted directly to the Drillco structure.

In the current capital environment, Drillco’s present an excellent opportunity for both private capital and E&P operators (public or private). The key to success for the capital provider is technical due diligence of the geology and economics of a drilling program plus the operator’s ability to perform. For operators, there are choices of capital partners.

Keys to Success

The Drillinginfo platform has grown exponentially over its 20-year history. All the data in this article are sourced solely from our platforms. We provide the industry’s leading dynamic datasets that are easily accessible to both the industry and capital providers to find the best partners or deal opportunities. No longer are players left in the dark. The data talks and the opportunities for wealth creation, particularly in today’s environment, are numerous. If you haven’t checked in lately, we encourage you to call us for a full demo of the power of Drillinginfo.

Also, check out the prior articles I’ve written under this series:

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Rising Above the Fray Series – Tracking the Horserace for the Anadarko Petroleum Prize

Rising Above the Fray Series – Tracking the Horserace for the Anadarko Petroleum Prize

Drillinginfo’s Market Intelligence and Market Research product lines have performed in-depth research regarding the valuation and strategic aspects regarding the battle between Chevron and Occidental for the prized Anadarko Petroleum (NYSE: APC). For more detailed information on these aspects, please visit a replay of Drillinginfo’s Webinar held on April 25, 2019, which can be found here:

Depending on the final outcome, the acquisition of Anadarko Petroleum will easily rank within the Top 10 all-time upstream oil and gas deals in history as measured in dollars of the day.

Recap

April 12, 2019, Friday morning

  • Chevron (NYSE: CVX) and Anadarko announce a definitive agreement executed on April 11, 2019 whereby Chevron would acquire Anadarko
  • Offer at announcement is $65/share (25% cash/75% equity) for Anadarko structured as $16.25/share cash and .3869 of Chevron stock.
  • Deal value of $50 billion consisting of $33 billion in equity and $17 billion of net Anadarko debt assumed.
  • Offer represents a 39% premium to Anadarko prior day stock price
  • Merger Agreement includes a $1 billion termination fee to be paid by Anadarko to Chevron. This equates to $2.04 per APC share based on its 1Q 2019 shares outstanding.
  • Anadarko closes Friday at $61.78/share – up 32%.

April 24, 2019, Wednesday morning

  • Occidental Petroleum (NYSE: OXY) announces a competing offer to buy Anadarko
  • Offer at announcement is $76/share (50% cash/50% equity) for Anadarko structured as $38.00/share cash and .6094 per share of Occidental stock.
  • Deal value of $57 billion consisting of $40 billion in equity and $17 billion of net Anadarko debt assumed.
  • Offers represents a 20% premium to Anadarko’s share price from the prior day ($63.99) and a 62% premium from Anadarko’s share price the day prior to the Chevron offer.
  • Anadarko closes Wednesday at $71.40/share – up 12%.

April 24, 2019, Wednesday

  • Chevron issues a statement – “We are confident the transaction agreed to by Chevron and Anadarko will be completed.

April 29, 2019, Monday morning

  • Anadarko announces intention to resume negotiations with Occidental.
  • Anadarko’s Board of Directors unanimously determined that the Occidental proposal could reasonably be expected to result in a “Superior Proposal” as defined in the Chevron Merger agreement.
  • Chevron issues a statement – “We believe our signed agreement with Anadarko provides the best value and most certainty to Anadarko’s shareholders.

April 30, 2019, Tuesday morning

  • Following reports by Bloomberg of an Oxy jet being in Omaha on Sunday, the dots connect with an official announcement that Warren Buffett’s Berkshire Hathaway commits to a $10 billion preferred equity investment (8% yield plus 80 million warrants to buy Oxy at $62.50/share) contingent on Oxy completing a deal with Anadarko.

While rare, a battle for the acquisition of a large, recognized E&P company is not without precedent. Certainly, within the U.S., the most famous battle began in late 1983 when Pennzoil made an informal but binding contract to acquire Getty Oil in a complex structure that valued Getty at $112.50/share. On January 6, 1984, Texaco announced an offer and Getty agreed to sell at $125/share. The battle famously resulted in a long legal dispute whereby Pennzoil (represented by attorney Joe Jamail) accepted a $3 billion settlement after Texaco filed Ch 11 bankruptcy.

The Scorecard of Offers for Anadarko (per APC share)

Company Date Price Cash Stock Cash/Equity
Chevron Offer  April 12, 2019 $65.00 $16.25 0.3869 CVX share 25%/75%
Occidental Offer  April 24, 2019 $76.00 $38.00 0.6094 OXY share 50%/50%
Occidental Offer  May 5, 2019 $76.00 $59.00 0.2934 OXY share 78%/22%

The Horserace: Implied Offer Values per APC Share and APC Share Price (as of Market Close)

  April 24 April 25 April 26 April 29 April 30 May 1 May 2
Chevron Offer $62.00 $61.87 $61.56 $61.79 $62.70 $61.83 $61.28
Occidental Offer $75.78 $75.69 $75.36 $74.62 $73.88 $73.03 $72.95
Anadarko Price $71.40 $71.77 $72.80 $72.93 $72.85 $72.37 $71.54

Update

May 5, 2019, Sunday

  • OXY affirms its bid of $76/share and increases cash component from $38 to $59. Deal would not require an OXY shareholder vote.
  • OXY also announced a sale of APC’s Africa assets to Total S.A. for $8.8 billion, contingent on completing the APC buy.
  • Anadarko states OXY bid under review for a “Superior Proposal” which if invoked allows Chevron four business days to revise its terms for APC.

May 6, 2019, Monday after market close

  • Anadarko deems the OXY proposal a “Superior Proposal.”
  • Chevron has four business days ending May 10 to submit a revised offer, extendable under defined certain conditions.

Finish Line

May 9, 2019, Thursday pre-market

  • Chevron declined to make a counter-proposal for Anadarko stating capital discipline, an advantaged portfolio and a 25% increase in share buyback program to $5 billion per year.
  • Chevron closed up 3.1% to $121.19 per share.
  • Anadarko closed down 3.3% to $73.39 per share.
  • Occidental closed down 6.4% to $56.33 per share.

For information regarding Drillinginfo’s Market Intelligence and Market Research products, click here.

This blog was last updated on May 9, 2019.

Rising Above the Fray Series

Rising Above the Fray Series

The Eagle Soars —

BP’s Transformative $10.5 Billion “Solid Buy”

As highlighted on July 10, a plethora of factors aligned to kick off a projected significant increase in U.S. M&A activity in the second half of 2018.  In dramatic fashion on Thursday, July 26, BHP and Chesapeake announced asset sales totaling $12.7 billion to three buyers – BP, Merit Energy, and Encino Acquisition Partners.  Thus, on a single day, Q3’s deal value already exceeded Q2’s total of $8.7 billion by 50 percent.  As of this writing on August 13, the momentum continues and in less than half way through Q3, U.S. upstream M&A deal value tallies $17.5 billion, or over 100% above all of Q2.

Looking back to the July 26 deals, Houston-based Encino Acquisition Partners bought Chesapeake Energy’s Ohio Utica shale for $1.9 billion, Dallas-based Merit Energy snapped up BHP’s Fayetteville assets for $300 million, and BP (who recently moved its Lower 48 business to Denver) purchased the Permian, Eagle Ford, and Haynesville onshore portfolio of BHP for $10.5 billion.

BP’s $10.5 billion buy of BHP’s U.S. shale assets is hugely positive.  After a long and well-publicized struggle, BP finally gets to play offense through a transformative deal that bodes well for securing its future as a major U.S. producer and opens up strategic options for the company, including a potential IPO of its U.S. business.  Not only did BP strike big, our analysis indicates it did so at an attractive price.  Notably, the $10.5 billion price tag ranks as the fourth largest U.S. upstream deal essentially since the beginning of the shale revolution.  That list is topped by Exxon’s $41 billion XTO buy in December 2009, followed by Freeport-McMoRan’s $16.3 billion buy of Plains Resources in December 2012, and BHP’s $15.1 billion buy of Petrohawk Energy in July 2011.

Regarding the BP buy itself, most market pundits touted it as the grand entrance of BP into the Permian Basin.  Indeed, BP did pick up 83,000 net acres in an over-pressured and liquids-rich portion of the Delaware Basin concentrated mostly in northern Reeves County, with key offset operators including Conoco, Anadarko, and WPX. However, we note that the acreage is largely in the condensate/wet gas window versus the oil window to the east.

Contrary to popular commentaries on the transaction, our valuation analysis indicates that the Eagle Ford is in fact the most valuable portion of the package, coming in at $4.8 billion (46 percent of the deal), followed by the Permian at $3.9 billion (37 percent), and the Haynesville at $1.8 billion (17 percent).  These numbers include the value of the various packages’ existing production based on our current market multiples of $50,000/daily bbl (oil & condensate), $20,000/daily bbl NGL, and $2,250/daily Mcf.  After backing out existing production, the Permian acreage does top the acquired land positions at $2.5 billion (or $30,400/acre), compared to the Eagle Ford (two packages) at $1.9 billion ($30,000/acre for Black Hawk in Karnes and DeWitt counties (core-of-core Eagle Ford) and $2,500/acre for Hawkville primarily in central McMullen County (gas window), and finally $1.0 billion for the Haynesville ($5,000/acre).

Regarding the Permian, the $30,400/acre number by our analysis appears to be a solid buy by BP.  The high water mark in the Permian was recently set at $75,000/acre in the $9.5 billion all-stock acquisition of RSP Permian by Concho Resources in late March.  In the Concho deal, the acreage covered core-of-core positions in both the Midland and Delaware basins.  On a comparative basis, Concho picked up 62,000 boe/d and about 92,000 net acres for $9.5 billion while BP picked up 40,000 boe/d and 83,000 net acres for $3.9 billion.

The true story of the deal may well lie in the Eagle Ford where BP touts 1,400 gross drilling locations at an impressive post-tax IRR of 40-95 percent.  On an apples-to-apples basis, BP touts picking up 3,400 gross locations in the Permian at roughly half the post-tax Eagle Ford IRR or 25-50 percent.  In the Haynesville, BP claims 720 locations at a post-tax IRR of 15-25 percent.  All the IRRs are based on $55 WTI and $2.75 Henry Hub.

Furthermore, the Hawkville area of the Permian in central McMullen and La Salle counties contains a largely contiguous block of an impressive 142,000 net acres.  This gas portion of the Eagle Ford may be a sleeping giant in BP’s forward plans as Drillinginfo’s Fundamental Edge research lights up the eastern portion of this acreage block as a highly economic portion of the Eagle Ford.  Also in this neighborhood, Silverbow has its Oro Grande field with type curves now at 14 Bcf EURs (1.9 Bcf/1000’ lateral) and IRRs of 60 percent based on $3.00 gas.

With this buy, BP has multiple ways of winning.  Not only has it acquired immediate scale, it also has strategic optionality between basins and between commodities.  BP also has the big data, technological clout, and intellectual capital to drive efficiencies and margins to the top-of-class status.

We are closely watching whether BP will be doing an encore buy – particularly related to a significant offset position to the core-of-core Black Hawk position being marketed by Pioneer Natural Resources (59,000 net acres to PXD and held in a JV with India’s Reliance) as Pioneer sheds assets to become a Permian pure-play.

For more on M&A or Fundamental Edge, please contact Drillinginfo.

 

 

 

Brian Lidsky, Senior Director, Drillinginfo Market Research. Prior to joining Drillinginfo, he had roles including EVP of John S. Herold, Inc., co-founder of Vigilant Exploration, and Managing Director of PLS Inc. He has extensive industry experience with particular expertise in M&A, Valuations, Market Intelligence, and Capital Markets. Brian holds a B.S. in Geology from Emory University and an MBA from the Jones Graduate School of Business at Rice University.