Permian M&A production surge/profitability could trigger new wave of Asian investment

Asian companies have signaled coming of potential second wave of international investments in US resource plays

The dramatic resurgence in US upstream M&A activity since mid-2016 has been driven by the vast resource potential and compelling economics in the Permian Basin, according to 1Derrick.

Deals in the Permian accounted for 48 per cent, or $24.8 billion, of total US transaction value in 2016 and an astonishing 77 per cent of the $18.5 billion in deals announced in the first 45 days of 2017, per 1Derrick.

Although the buyers have been almost exclusively North America based firms, 1Derrick’s analysis suggests that the M&A market could be on the cusp of a second wave of international investments in US unconventional resource plays.

“The attractiveness of a de-risked US resource play investment to international buyers is reflected in the capital allocations of major US-based firms with a global portfolio,” said Mangesh Hirve, CEO of 1Derrick.

1Derrick has unveiled new proprietary research that will assist European, Asian, and other investors in identifying and evaluating potential M&A opportunities.

“For example, Chevron is boosting Permian investment by 45% despite an overall 11% reduction in total investment, while Occidental Petroleum is doubling its spending in the play from $600 million to $1-1.4 billion. ExxonMobil made its largest acquisition since it bought $1.6 billion in Bakken assets from Denbury Resources in 2012 with its $5.6 billion January 2017 purchase of Delaware Basin properties. International firms with a limited US portfolio may conclude that US shale is a crucial part of a global upstream portfolio. As research providers, we have expanded our offerings to guide them to the most attractive investments,” said Hirve.

First wave of international buyers

The first wave of international investments in US unconventional plays began in 2008 with Statoil (Marcellus) and BP (Fayetteville) acquiring acreage from Chesapeake Energy. Activity surged in 2010-12 as the value of transactions with a European or Asia-Pacific buyer totaled over $67 billion.

Major European company deals included the 2010 entrance into the Marcellus by BG and Shell, Statoil’s $4.7 billion 2011 purchase of Bakken-focused Brigham Resources, and Shell’s $1.94 billion purchase of Chesapeake’s southern Delaware Basin assets.

Significant transactions by Asian and Australian buyers include mining conglomerate BHP Billiton acquiring Petrohawk Energy for $15 billion, Devon and Sinopec forming $2.2 billion JV for five unconventional plays in US and Pioneer and Sinochem forming $1.7 billion Wolfcamp JV.

International investment in US shale dropped off dramatically after 2013, with just $825 million spent by European firms and $1.5 billion by Asian buyers in and after 2014.

The plunge in oil prices that roiled the entire oil and gas industry virtually brought the international M&A market to a halt.

Source: 1Derrick

Attractiveness of Permian Basin to international buyers

However, a new investment paradigm has been forged in the aftermath of the oil price crisis, one that once again highlights the attractiveness of US unconventional resources.

Dramatically lower drilling, completion and lease operating costs and soaring well productivity have resulted in the best Permian acreages offering IRRs of over 50 per cent even at oil prices under $50/bbl.

International investors have demonstrated a willingness to pay a premium to enter de-risked plays with predictable costs in which discovered resources can quickly be converted to production.

A bonus is a regulatory environment that may provide additional incentives for US oil and gas.

Some Asian companies have already signaled the coming of a potential second wave of international investments in the US resource plays. Yantai Xinchao acquired Midland Basin oil fields for $1.08 billion.

Meidu acquired assets from Devon and Silver Oak, and Shun Cheong acquired Eagle Ford assets from Stonegate for $278 million.

Also, Thai mining company Banpu acquired Marcellus assets from Chief Oil & Gas and Range Resources. Recent reports indicate Osaka Gas, Kogas and Sinochem are also exploring US resource play investments.

“European and Asian firms face two major challenges in identifying the right opportunities in the US resource plays. The first is unveiling the full opportunity set in a region where a large portion of the available acreage is held by a plethora of private companies and investment entities with little public disclosure. The second is calculating an accurate valuation of the properties by assessing the drilling results and comparable transaction values of nearby acreage. 1Derrick has developed proprietary research to address both challenges,” said aid 1Derrick’s Ajit Thomas.

Tracking “stealth” transactions in resource plays

To help clients discover all potential opportunities, 1Derrick has uncovered and examined hundreds of “stealth” transactions that were never publicly disclosed.

These include, for example, more than 20 significant transactions by Double Eagle Energy, which recently sold 71,000 net acres in the Midland Basin to Parsley Energy for $2.8 billion.

This exhaustive research effort, which has resulted in the most comprehensive US deals database in the industry, has also revealed the full holdings of more than 60 private companies, most of them private-equity funded.

These include Forge Energy (backed by EnCap and Pine Brook), which has 75,000 net acres in Andres, Gaines, Lubbock, and Pecos counties; Steward Energy II (backed by Natural Gas Partners), which has made multiple acquisitions in Yoakum County; and CrownRock, a JV between CrownQuest and Lime Rock Partners, which has completed several transactions in Howard and Martin counties in the Midland Basin.

Solving the acreage maps jigsaw

1Derrick has also translated its proprietary research into comprehensive acreage maps that display the full holdings of both public and private E&P companies.

These maps allow prospective buyers to quickly access analysis on transactions involving nearby acreage. Clients can also identify the owners of the properties and follow through with research on the results of recent drilling and completion activities.

Among the large private holdings detailed on 1Derrick maps are the 83,000 net acres in Scurry, Midland, Martin, Glasscock, Howard, Reagan, and Crockett counties held by Trail Ridge Energy, backed by Riverstone Holdings and Trilantic Capital Partners; a 65,000-acre JV between Henry Resources and Riverstone-funded Carrier Energy; and 78,000 acres across the Permian owned by Vermilion Cliffs Partners, which is backed by Old Ironsides Energy.

“To date, the surge in Permian activity has been fueled by stock-based acquisitions by US public companies. International companies will bring cash to the table, which should provide them with a rich base of opportunities from PE-backed firms and other investors seeking quick, liquid monetization of their holdings. We will continue to evolve our proprietary research to assist international buyers in accessing these opportunities,” said Hirve.