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‘Permania’ Leads Charge in 2017 U.S. Deals, with PE Backing 63 New E&Ps

Fifteen of the 20 largest U.S. oil and natural gas deals last year were financed by private funding, which also committed more than $11 billion to 63 new energy ventures, according to a tally by 1Derrick.

Total U.S. upstream transaction values in 2017 were about flat with 2016 levels at $64 billion and close to the averages from 2008-2015 of $69 billion, researchers with the oil and gas information provider said.

However, with $43 billion in deals announced in the second half of 2016 and $46 billion through first six months of 2017, transaction value in the last half of 2017 only reached $18 billion.

The decline in dealmaking in late 2017 was most notable in the Permian Basin, where transaction value fell to $2.6 billion, 1Derrick’s team said. Still, stronger industry fundamentals and an analysis of U.S. private equity (PE) investment and private merger/acquisition (M&A) trends may suggest “another round of dealmaking and consolidation is on the horizon.”

Overall, domestic dealmaking last year by exploration and production (E&P) companies again was dominated by the Permian, which peaked at $17.5 billion during 1Q2017, led by ExxonMobil Corp.’s $6.6 billion purchase of New Mexico acreage from the legendary Bass family. Also early last year, Noble Energy Corp. paid $3.2 billion to buy Clayton Williams Energy Inc. and its West Texas warchest.

“U.S. M&A transaction value was driven by ‘Permania,’ an intense bidding frenzy for large asset packages in the Permian Basin, before conditions changed by mid-2017,” said 1Derrick COO Mangesh Hirve. “Falling oil prices widened the gap between buyer and seller expectations.

“A significant decline in E&P company stock prices made it more expensive for producers to use their equity to fund large acquisitions. However, sub-billion M&A activity level remained solid, with the number of transactions between $100 million and $1 billion increasing from 16 in 2Q2017 to 17 in 3Q2017 and 20 in 4Q2017.

“More importantly, investment continued to pour into the sector, as more than 60 new companies received more than $11 billion in capital commitments from PE firms in 2017. Private E&Ps and PE-backed firms accounted for 28% of total acquisitions in 2017.”

Permian deal values plummeted to $2.8 billion in 2Q2017, but the formerly strong activity in West Texas and New Mexico was replaced by $10 billion in Marcellus Shale deals between April and June, led by EQT Corp.’s $8.2 billion takeover of Rice Energy Inc.

“Second half 2017 activity was lower but broad-based, including more than $6 billion in the Rockies,” 1Derrick researchers said. “Producers continued to high grade their portfolios by shedding noncore acreage and expanding contiguous positions in key plays to increase average working interests and expanded lateral drilling opportunities.”

Even though there was a mid-year dip in oil prices, operators “reaffirmed their long-term confidence in industry growth by remaining committed to their 2017 capital programs. That confidence was shared by PE firms, which played a major role in 2017 M&A activity.”

According to research, PE-backed firms were involved in 15 of the 20 largest deals and participated in nearly $15 billion each in acquisitions and in divestitures during the year. More significantly, PE committed more than $11 billion to 63 new companies in 2017.

According to 1Derrick, the largest PE-related allocations last year were made by Quantum Energy Partners (QEP), which committed $2.5 billion to five E&P startups; EnCap Investments, which provided $1.8 billion to seven E&Ps; and Apollo Global Management, which spent $1.6 billion to finance four E&Ps.

Appalachia-focused HG Energy II received the highest commitment among 2017 start-ups with $1.5 billion from QEP. The Canada Pension Plan Investment Board contributed $1 billion to Encino Acquisition Partners, which is seeking assets across multiple basins. PE-backed start-ups are also targeting the Midcontinent, Eagle Ford Shale and various Permian formations.

“This level of PE-investment is one reason why we believe another wave of U.S. M&A and consolidation is on the horizon,” said Hirve. “Very few of these new companies have made their first acquisitions.

“For example, EnCap and Natural Gas Partners each funded seven companies that have yet to make any significant acquisitions. The remaining capital will likely be allocated over the next two or three quarters, with the focus expanding beyond the Permian.”

1Derrick’s team expects oil-weighted investments to accelerate “to the rapidly growing alphabet soup of plays in the Midcontinent,” led by Oklahoma’s myriad, stacked reservoirs. Also expected to see more activity is the Denver-Julesburg Basin’s Niobrara formation and the Bakken Shale, “where margins have expanded since the Dakota Access Pipeline came onstream,” Hirve said.

On the natural gas dealmaking front, 1Derrick expects transactions to gain traction in Appalachia, where output has reached record growth, as well as in the resurgent Haynesville Shale, where gassy output jumped year/year by more than 25%.

“The oil price rebound has encouraged public E&Ps to extend their accelerated investment programs commenced in 2017,” 1Derrick researchers said. “Early 2018 guidance suggests an average 15% boost to 2018 capital spending,” already affirmed by some E&Ps and private prognosticators.

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