A&D Intelligence

In its continued quest to take significant stakes in North American unconventional resources, India-based Reliance Industries is once again rumored to be targeting yet a third U.S. large independent for a joint venture in a shale-gas play—or more.

Quicksilver Resources is the target du jour. According to Mumbai’s Daily News & Analysis, in addition to a JV, Reliance might be interested purchasing a stake in the company or even the entire company.

The Fort Worth producer holds sizable shale positions in the Texas Barnett shale and Canada’s Horn River Basin, but is tight on cash. It’s debt load stands at $2.5 billion, with a debt-to-market cap ratio of 70% and no free cash flow to boot. It is also sitting on numerous uncompleted wells in the Barnett, waiting patiently for better days. They may have arrived.

The Texas company has already partnered with Italian energy producer ENI for a portion of its Barnett holdings in a relatively small JV late last year, and at the time suggested it was pursuing partners for the remainder of its Barnett and possibly its Horn River assets, where it now holds some 130,000 net acres in British Columbia.

Reliance has satiated previous rumors by following through on deals with Atlas Energy in the Marcellus shale and Pioneer Natural Resources in the Eagle Ford shale, where it took nonoperated positions for a combined $3 billion. Internal sources have verified that the Indian energy giant was still actively seeking a greater position in North America.

Global Hunter Securities’ analysts have this view: “Our take is that a joint venture would likely be focused on the Horn River Basin or other emerging plays and not the entire company, based on Reliance’s entry into other early stage plays.”

Simmons & Co.’s Jeff Dietert suggests a “favorable” price of $10,000 an acre for the Horn River position would “remove a financial overhang and provide additional development visibility.”

In my view, a Reliance rumor is as good as gold. The only questions remain, how much gold, when and where?

Word has leaked to the international press that Indian energy conglomerate Reliance Industries is stalking a joint-venture opportunity in the Eagle Ford shale. Specifically, looking to acquire a 40% piece of Pioneer Natural Resource’s South Texas stake. The sum: $2 billion.

If you’ll remember, Reliance took a 40% piece of Atlas Energy’s holdings in the Marcellus shale for $1.7 billion, completed last month, joining a growing line of foreign players coming to onshore America. And if you’ll remember, Pioneer has been not-so-quietly shopping for a JV partner this spring. The company has some 310,000 net acres in the Eagle Ford. An announcement is imminent by the end of June.

Wells Fargo Securities analyst Michael Hall pegs the metrics at $16,130 an acre, which he notes is higher than expectations of $12,000 per acre and better than Reliance’s bid for Atlas’ Marcellus shale assets at $14,167 an acre.

If so, Reliance joins ExxonMobil and Royal Dutch Shell as majors moving on large positions in the shales. The same rumors say Reliance is in further talks with other shale players.

Don’t be surprised if the Indian company, led by the world’s fifth richest man Mukesh Amboni, ends up with a dominant footprint in North American shale gas.

Hypothetical M&A combinations were the theme of the week, says Jefferies & Co. analyst Subash Chandra, with underperforming gas names as sellers and the majors buying.

Except few of the combinations make sense, he says. “In the few completed transactions we’ve seen, there is no evidence of an appetite for big premiums to NAV.”

While buyers are willing to look ahead a year or so, no valuation is being given to probable reserves beyond that point, he observes.

Rumored targets such as Petrohawk Energy Corp., Southwestern Energy Co. and Tullow Oil Plc trade at “significant premiums” to 2011 proved NAV, effectively eliminating them as likely targets. Ultra Petroleum Corp., however, does not.

Chandra says the CEO of Petrohawk stopped by his office this week—that would be Floyd Wilson—”stating unequivocally that buyers have expressed zero interest, terrified by the premium that may be required.”

Potential buyers have similar dissuading issues. ConocoPhillips carries the “searing legacy” of the Burlington acquisition. ChevronTexaco consistently denies wanting to make a corporate shale transaction. Devon Energy Corp. staunchly states it is not seeking a suitor, thus making a high premium a credibility killer. And BP Plc “has clearly demonstrated an appetite for assets over companies, in the U.S. at least.”

Private company acquisitions, on the other hand, are very much alive. “With baited breath we await the results of the Common Resources data room and a possible deal for Ellora Energy.”

As for Devon, Jefferies analyst Biju Perincheril believes the company received a “good, not great” price for its international and Gulf of Mexico portfolio, but says, “for a company dedicated to North American onshore plays, Devon’s portfolio outside of the Barnett and Cana shales has holes—the company may be forced to pursue acquisitions.”

He adds: “Reminds us a lot of another large-cap North American onshore name in early ‘08.”

I’m guessing XTO. And we know the end to that story.

<!–[if !mso]> <! st1\:*{behavior:url(#ieooui) } –>

With a deal like Schlumberger’s announced acquisition of liquids partner and drillbit maker Smith International for some $11 billion (adding in debt), speculation abounds as to “Who’s next?”

Tudor, Pickering, Holt & Co. analysts think a wave of oilfield service consolidation is premature thinking. “It doesn’t really change the landscape that materially—the biggest player is getting bigger—and it doesn’t force anyone to combine defensively.”

But Pritchard Capital Partners analyst Brian Uhlmer sees the landscape differently and painted a picture of the possibilities.

“There is always potential to ride the acquisition speculation in several names. The ones at the top of the list in our opinion that are most likely are in the pressure pumping/well-servicing space. For management teams that are seeing pricing leverage in certain plays beyond what the stock market is pricing in, there may be opportunities for accretive transactions.”

The first on the list, he says, is Superior Well Services Inc. With its newer fleet of equipment and footprint in the Marcellus, it is a potential target for both Patterson-UTI Energy Inc. and Nabors Industries Inc. as well as certain Canadian listed players.

The next potential is for Complete Production Services Inc. to merge with Basic Energy Services Inc., benefiting by expanding the Texas market, although Uhlmer sees this combo as a long shot.

The offshore drillers have a need to consolidate, he says, and the likely suspects are Ensco International Inc. with Noble Corp. and Pride International Inc. with Seadrill. Pride already has the take-out premium in place and “would be bought out (in the) $35 neighborhood, while Ensco lost its premium with the move to the U.K. and would be around a $55 acquisition price and thus be a more attractive speculative buy.” Both transactions would be primarily stock if they were to happen, he surmises.

For manufacturers, T-3 Energy Services is an excellent candidate either for National Oilwell Varco to grow its BOP capacity or the LeTourneau/Stewart & Stevenson three-way merger talk could begin again later this year.

Tesco Corp. is another name that circulates, “but there is not a considerably large market for acquirers who need to add top drives to their existing suite of products.” Then there is Dril-Quip, always discussed either to be acquired by National Oilwell Varco, General Electric Co. or FMC Technologies, all of who could use the complimentary products and manufacturing capacity.

The value buyers now place on various reserves categories has changed dramatically from a few years ago, says Jefferies & Co.’s Bill Marko. At the peak, companies would pay 100% of the PDP at a low discount rate (typically between 8-10%), for behind pipes nearly 100%, for a good portion of the PUDs, and they might even pay for the probables and possibles.

When the market bottomed out a year ago, however, sellers were only getting paid for the PDP component. “That’s where the buyers adjusted,” says Marko. “They were not willing to take much risk beyond PDP.”

That is starting to change. “We’ve seen some decently aggressive oil deals lately. People are starting to pay more for value beyond PDP.”

While A&D activity has trended up, the return has been slower than he anticipated. Most deals in second-half 2009 involved shale or oil, and many were “do-overs” from broken deals in late 2008, such as Denbury Resources’ acquisition of Conroe Field assets, and several divestitures by Forest Oil.

Unease over gas prices will stifle gas-weighted deals over the next year, he anticipates. “They’re still worried about over supply, but you’ll see some deals.”

Noncore exits will come to the forefront, such as recent packages offered by St. Mary Land & Exploration, Encana and Forest. “Others will come to market where companies are cutting costs. And a lot of shale-focused companies are trying to sell their nonshales.”

2010 will involve big companies taking positions akin to ENI’s quarter-billion dollar deal in the Barnett to ExxonMobil’s $41-billion buyout of XTO Energy. “We’ll see everything in between,” he says.

Joint ventures will continue to be popular, and farm downs in the deepwater Gulf of Mexico will proliferate.

“It will be a good year for A&D.”

The sentiment amongst most in the upstream E&P world is that fall bank borrowing-base redeterminations will largely be a nonevent—in spite of fears to the contrary all summer. Most producers that barely survived the spring redeterminations thanks to the good graces of lenders not wanting to foreclose on any more assets have been working diligently in the interim to raise cash and eliminate debt to avoid the ax this fall.

But don’t breathe easy just yet, portends Tim Murray, managing partner with Guggenheim Partners.

“The fall borrowing-base redetermination will be worse than the spring,” he told a group at ADAM Houston. “I can be upbeat and lie to you or tell you the truth.”

For those who believe the spring redetermination season was gentle, he points to 20 E&P bankruptcies that resulted. “If that’s not bad, what’s your definition of bad?” he asks.

Yet the spring season could have been worse, he said, if not for the fact that much of the distress was mitigated by attractive hedging. “When the hedges start to roll off and you can’t replace them, that’s when it’s going to get tough,” he warned. More companies will be forced to sell assets, to restructure or be thrown into bankruptcy.

He said he is working with two clients currently with borrowing-base redeterminations still pending, but “we already know what the numbers are. Just run your bank price decks. You’re going to see good management teams with good assets have a day of reckoning. It’s coming.”

For its part, he said Guggenheim hedged its portfolio for two years in 2008 and is looking for a commodity-price spike to hedge again.

Analyst Dan Pickering stirred up debate at the A&D Strategies and Opportunities conference recently when he predicted natural gas prices would trend to $7.50 per Mcf in 2010, a far cry from the sub $3 mark at the time, emphasizing his call with a happy face and labeling his talk “2010—The Year of Feeling Better.” 

“The die is cast for 2010,” he says. The co-president and head of research for Tudor, Pickering, Holt & Co. bases the target price on the freefall of supply. “By the middle of next year, given how steeply rig count is falling and given base decline rates of about 25% for total production, we’re going to be down about 7 Bcf per day. It doesn’t matter if the winter is cold or hot, or if a hurricane affects things—things are going to tighten up and the market is going to get better.”

For A&D, he says, 2010 is going to be a year in which companies breathe a sigh of relief. “If gas is going to be $7.50, that will feel a whole lot better than today. Folks that have been holding on hoping things will get better are going to get a respite.”

So the likelihood of forced selling in 2010 will diminish, although “we still have to get through 2009.” He expects many companies, particularly private-equity backed, that have been on the sidelines will try to catch the rebound as prices trend up.

But wait. The smiley face comes off in 2011, which is the Return-To-Reality year per Pickering. With the ability to add supply fairly easily and quickly, and with shale-gas basins producing more with fewer wells, the feel-good run-up to $7.50 will deflate a bit as supply fills the gaps. “I’m using a number that has a 6 on it,” he states. Likely: $6.50 for 2011.

The wake-up call is going to be for the “have nots,” he says, those companies operating in high-cost basins. “What if you need $7.50 gas to make money?” he questions.

And how do these have-not operators survive? “You look at those places where you can operate cheaper and you buy your way into them.  We call it consolidation via necessity–folks are going to wind up in different spots.”

Check your F&D costs now.

Barnett shale and Gulf Coast player Carrizo Oil & Gas has aggressively upped its stake in the Marcellus shale using funds from financial partner Avista Capital Partners to boost its holdings with up to 212,000 acres in the play. In 2008, Avista committed $71 million toward the play, with a commitment of sharing costs 50/50 going forward.

KeyBanc Capital Markets analyst Jack Aydin says Carrizo is focusing its leasing efforts in Susquehanna and Bradford counties in northern Pennsylvania, with current holdings at some 30,000 acres there with 20,000 more in negotiation.

Says Aydin, “Our impression is that the company has been paying $2,000 to $3,000 per acre for five-year leases with additional five-year options and royalties of 15-18%.”

Carrizo also holds 112,000 acres in West Virginia and 70,000 acres in Centre, Clinton and Clearfield counties in central PA, with a total of 103,000 acres prospective for Marcellus net to Carrizo discounting its 50% partnerships with Avista.  And lease expirations are not an issue. “We have almost nothing expiring this year,” says Carrizo president and CEO Chip Johnson.

Additionally, to advance lease acquisitions in both the Marcellus and Barnett, Carrizo is seeking to form a land bank in which investors would pool $25 million or more, providing Carrizo with an option to buy the leases for a 120% premium after a period, with investors retaining an override.

Aydin surmises, “Carrizo’s management believes the prevailing economic, credit market and commodity price environment have made it possible to buy premium acreage and, in certain instances, PUDs at depressed prices.” Additionally, Carrizo may advance this goal with asset sales involving a Barnett midstream gathering system and its U.K. North Sea assets.

BMO Capital Markets analyst Dan McSpirit says Carrizo’s increased exposure to the Marcellus could be a catalyst for growth. “We believe Carrizo is one micro-cap stock among select few positioned to come out the other end of this asset value deflationary period as stonger, and potentially bigger, company.”

Steve Toon, Editor, A&D Watch; The A&D Center, www.A-Dcenter.com; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

The highly dreaded season of semi-annual bank borrowing-base redeterminations has come and mostly gone with relatively few E&Ps getting the anticipated death knell. Many feared credit limits would be reset below a company’s current borrowings and with no cash to make up the difference. The rolling event was supposed to throw a flurry of assets into the marketplace.

While it’s no consolation to those currently fighting getting dismantled in the bankruptcy courts, (ie. Crusader Energy, Energy Partners) like the Swine Flu, the Redetermination Pandemic resulted in few fatalities in spite of the hysteria and few assets offered. Why is this?

The simple answer is that banks, also under assault in the current economic battle, have no place and no desire to warehouse all of those E&P assets. Like with the single-family housing foreclosure crisis, banks don’t want all these assets coming back on the books and tying up their lending ratios.

Keep in mind that when the banks take back these assets, they don’t have a buyers market for selling them. After all, buyers are having a hard time getting capital for acquisitions due to tight lending practices by—banks.

Better to work it out with an otherwise healthy E&P currently making payments than to repo their assets.

And as these E&Ps jump this hurdle, they are quick to shout their financial stability in celebration. Some recent examples of these include:

• Carrizo Oil & Gas received a $40 million increase to $290 million.

• Stone Energy’s base was approved at $425 million, exactly the amount owed.

• Rex Energy was reaffirmed at $80 million with $5 million outstanding.

• Encore Acquisition’s base was lowered from $1.1 billion to $900 million, essentially the same following a $190 monetization  of commodity derivatives.

• Whiting Petroleum’s base was increased from $900 million to $1.1 billion with $610 million drawn.

• Contango Oil & Gas holds steady at $50 million with no debt outstanding.

• SandRidge Energy was reaffirmed at $1.095 billion while basis points were raised by 75 to 100 and commitment fees to a flat 50 basis.

• EV Energy Partners was revised to $465 million with $440 million outstanding and $26 million cash on hand.

• BreitBurn Energy dropped from $900 million to $760 million, still above its $717 million borrowings but enough to put it on a distributions diet to pay down debt.

• Approach Resources was reaffirmed at $100 million with amendments to terms set higher.

• Concho Resources was reset from $1.2 billion to $960 million with terms increased.

• Rosetta Resources was restated from $400 million to $375 million.

So breath a sigh of relief. The reaper has come and gone. At least until October, when we do this all over again, and sustained low commodity prices combined with hedges rolling off late in 2009 could start the pandemic frenzy all over again.

(For an analysis on bank-borrowing redeterminations by Tudor, Pickering, Holt & Co. Securities, click here.)

While the rest of the A&D community sits in a quiet circle, clearing their throats occasionally and waiting for someone to make the first move, the crew over at The Oil & Gas Asset Clearinghouse say their shop is buzzing with activity. For example:

Auction activity is up and metrics are rising.

* At OGC’s last auction in March, twice as many bidders were registered as before the crash.

* Pre-crash royalty interests sold at OGC auctions for $101,196 barrels of oil equivalent per day; since July, they’ve avereaged $122,809 barrels equivalent per day—an increase of 18% during a period when oil and gas prices fell 67%.

Negotiated transactions are also drawing a lot of renewed interest.

* Before July, OGC saw about 25 data requests per sale. Since late 2008, they are averaging 100-plus—a 400% increase.

* Pre-July, they averaged five to eight formal offers per package. Since August, Clearinghouse has received as many as two dozen.

* Pre-emptive offers have always been common, but rarely big enough to induce clients to interrupt the sales process. In 2009 they’ve seen one offer that was aggressive enough to persuade the client to accept the deal without ever bringing it to market.

“We’re seeing record numbers of buyers looking at our sales packages right now—both auction and negotiated,” says Clearinghouse’s Geoff Roberts. “The more I talk to people, the more I find that this information is startling and exciting to them. They seem starved for good, positive news.”