DALLAS—Rising oilfield-service costs are contributing to the slower pace this year of A&D dealmaking since the first quarter, according to Billy DeArman, a principal with private-equity investor Tailwater Capital LLC.
“People who were using low service costs to underwrite valuations are now looking at prices going up, so you don’t have that tailwind,” DeArman said at Hart Energy’s A&D Strategies and Opportunities conference.
In addition, “people over the last 18 or 24 months that were willing to make bets on [commodity] prices…are not anymore. So that changed.” As a result, “stuff’s not happening as quickly.”
Prospective sellers are beginning to come back to the table with a revised expectation, though. “People [looking to sell] were probably prouder of their assets than we were in terms of buying them.” But improved parity in bid/ask is being found.
Billy DeArman, a principal with private-equity investor Tailwater Capital, and Chris Atherton, president of asset marketer EnergyNet, discuss current trends they're seeing in A&D activity in Dallas on Oct. 12. (Source: Tom Fox/Hart Energy)
Chris Atherton, president of asset marketer EnergyNet LLC, said deals were more difficult to get to the finish line in the second and third quarters, “but we’re getting them to the finish line.”
DeArman said a handful of processes have failed, but he’s in the midst of four deals now.
Travis Nichols, a managing director for investment banker Tudor, Pickering, Holt & Co., said reduced access to public-equity markets to fund acquisitions is making public buyers “more choosy about what they’ll buy.” They have to look at funding a deal with debt and the effect this will have on the leverage ratio.
“Without that equity, there is some reluctance—unless it’s a bolt-on,” Nichols said. “If it is an obvious fit, there will always be money. We’re just not seeing a lot of folks on the public side excited about adding in a new strategic area or doing anything to really stress the company.”
Meanwhile, said David Edwards, an executive director with UBS Investment Bank, “there is still a whole suite of private equity out there for acquisitions, so most of the assets are finding a home.”
Nichols expects more family-owned E&Ps to divest, such as the John Yates family sale to EOG Resources Inc. (NYSE: EOG), the George Yates sale to Matador Resources Co. (NYSE: MTDR) and the Bass family sale to ExxonMobil Corp. (NYSE: XOM).
“It’s generally a very pristine part of our ecosystem where they’re never sellers—until, one day, they sell,” Nichols said. “For a lot of those folks, having lived through this down-cycle, which has been prolonged, and now the…ability to trade assets” for equity to a high-quality buyer “that’s going to pay a dividend, I think, is going to be very compelling.
“I think we’ll see more of these in the next 12 to 24 months.”
Edwards agreed, adding that the logical buyers will continue to be majors and large independents.
As for who will be the buyers of long-lived, cash-flowing properties in the absence of the MLPs from the buyside of the table in that space, Nichols said, “I’m hoping everyone in this room.”
Those who may not want to pay $50,000 for a Permian acre, “there is a way to make money in the business and that’s buying cash flowing assets.”
Will more of this type of property come on the market? Nichols said, “They’re coming. There will be a lot of packages over the next 12 months that will hopefully provide the supply for folks in this room.”
Nissa Darbonne can be reached at ndarbonne@hartenergy.com.
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