TULSA, Okla.—It’s no secret that private equity buyers have come to rule the A&D market in the Midcontinent, but what may not be as widely known is that they’ve done so behind public buyers who’ve left. And this, one financial analyst says, makes Midcon’s loss also its gain.

“The publics seemed to have picked the Midcontinent as a place to exit,” says Craig Lande, managing director at RBC Richardson Barr. “They’re moving into the Permian and Bakken, where they’re getting rewarded in the public markets, and the Midcon has been a real playground for private equity and MLPs.”

Speaking at Hart Energy’s DUG Midcontinent conference in Tulsa, Okla., recently, Lande cited a number of the high-profile deals in the region, including those by Peak Energy Resources, EnerVest and Vanguard Natural Resources. He also mentioned a few active financial buyers by name, such as George Solich and Templar Energy’s David Le Norman.

And although Lande was addressing a crowd of oil and gas professionals who came to hear about all things Midcon, he said you can’t talk about the Midcontinent without also talking about the Permian Basin.

“This is interesting to me,” he explained. “You have a multi-pay area in the Midcontinent, yet the Permian is getting all of the attention. I think there are a lot of zones that have been left behind by the public, and I think private equities are just the type of companies that are going to take these to the next level in the next couple of years.”

This was just one of several themes in the wider A&D market Lande said he’s seen in recent months, particularly concerning the private equity sector.

“Another big theme has been buyer demand,” he said. “The private equity sector has been a terrific buyer and a very aggressive buyer in the last several months, which has not historically been the case.”

This is all because capital markets, Lande said, have been wide open.

“A high-yield market with low interest rates have been open and led to a lot of transformational-type acquisitions from small midcap companies, specifically. The equity markets have been white hot. The IPO window is wide open.”

In addition to the six IPOs the market has seen since June 2013, Lande thinks there will be four or five more in the next several months.

Overall, Lande said, there’s been a valuation arbitrage shift from A&D to IPO.

“There is a big value arbitrage in some of the areas, specifically in the Marcellus and Utica areas. You’re seeing $30,000 to $45,000 enterprise value to dollar per acre type numbers just to pick on one metric, really robust metrics,” Lande said. “And we’re going to continue to see more IPOs from private equity as long as that exists.”

Another A&D theme has been the shrink-to-grow strategy involving large caps and the majors, Lande said.

“Four or five years ago, you’d be rewarded in the public markets for having a diverse asset base, being in multiple basins,” he said. “Now, you’re getting penalized for being in multiple basins. There are a lot of resource plays these companies have, and it takes a lot of capital to prosecute all of it, so the public investor wants to see these guys focus on one or two basins.”

The result is that many big players are selling off portions of their assets to redefine their portfolios.

The strategic acquisition is another A&D theme, Lande said. He used Devon Energy’s acquisition of GeoSouthern Resources as an example.

“Devon has spent the last few years buying more exploratory acreage, maybe at a lesser valuation, but that takes longer to cash flow. And some may not work out,” he said.

Compressing the time line, Lande said Devon went into the Eagle Ford, paid a strong valuation at $46,000 per acre, but this time in a core part of the play.

Like Devon, most public companies are now seeking core resource play acreage and are willing to pay a premium. But with core acreage representing approximately 30% of any resource play, fringy, non-derisked acreage struggles to trade, he said.

“In 2013, if someone tried to jam 50,000 more [non-core] acres down someone’s throat, they choked. The only thing these guys are looking for are core of core,” he said. “If it’s not derisked it’s going to sell at a deep discount or just all out fail.”

Lande counts joint ventures defunct. “JVs have essentially flat-lined,” he said. “A lot of international guys who came in and did JVs didn’t see them work, so they’re going to be much more selective. We’re seeing that part of the market go away.”

He attributed the decline of international joint ventures to two challenges:

  • The four- to five-week timeline that’s typical for the process is partly to blame. “Asians and other internationals just can’t play in a four- to five-week timeline,” Lande said. “So many deals we see them do, quite frankly, are failed deals where there are no timelines.
  • “And the other challenge they have is 99.9% of them just can’t operate in the U.S.,” he said. “They don’t have the skill sets to do so or the teams in place, so they need an operating team to come with the asset, which, as you know, very rarely is a team going to come with an asset.”

Looking ahead to 2014, Lande predicted more of the same themes, albeit with an ever-optimistic view of corporate M&A possibilities.

“I say this every year. Everyone always thinks there’s going to be an uptick in corporate M&A,” he said. “You’ve got a lot of companies out spending cash flow – these resource plays require a lot of capital – so you know, I think as some of these companies get down from eight basins to two basins, they’ll become a more attractive target to the bigger guys. You should see some more corporate M&A.”