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Experts See M&A Activity Increasing in Appalachia This Year After Slow 2015

After 2015 failed to deliver the expected spike in oil and natural gas industry merger and acquisition (M&A) activity in the United States and abroad, a group of Appalachian experts is anticipating much more this year, particularly in the Marcellus and Utica shales.

Speaking on a panel at this year's Northeast Oil and Gas Awards Industry Summit on Wednesday in Pittsburgh, the experts agreed that better assets would be available this year and owners battered by the prolonged slump in oil and gas prices would be more willing to part ways with them for lower prices as the natural gas market is closer to a bottom.

"I think we're expecting a much more robust M&A market in 2016. We talk a lot in our shop that in 2015, there were a lot of things for sale, but not on sale. There were a lot of deals that didn't close or didn't meet reserve," said EdgeMarc Energy COO Callum Streeter. "Already this year, we're starting to see a lot more tier one assets. I think last year you saw people maybe trying to shed assets that were not contiguous or were kind of not really core assets in portfolios. But now we're starting to see really high-quality assets, a lot of [held-by-production] components and proved developed producing associated with them.

"We really do expect to see the M&A market here heat up in 2016 and potentially see private equity chase the assets as well," added Streeter, whose company is one of the largest privately-owned independents operating in the basin. Canonsburg, PA-based EdgeMarc is backed by Goldman Sachs and has about 52,000 acres in Marcellus- and Utica-rich counties in Pennsylvania and Ohio.

With the downturn that began in mid-2014 and stretched throughout last year, many forecasters had expected M&A activity to reach new heights in 2015, but those assumptions never proved accurate.

In a report released in January, Deloitte LLP noted that the commodity slump had created price disparity between buyers and sellers last year. With no clarity on when prices would rise, the firm said, M&A activity remained low and could continue to remain low this year until factors such as lending pressures and commodity pricing narrow the bid/ask spread for transactions.

In all, Deloitte found that M&A volumes last year were lower than during the Great Recession (see Daily GPIJan. 25). The deal count declined by more than half to 379 from 709 in 2014, while values also fell 20% year/year.

"Here, in this basin, players will start to put some more attractive assets out there," said Manager of Business Development and Planning for Chevron Appalachia LLC Marc Payne. "There is a distressed position for many of these companies, and it's a world of opportunity.

"We did put some of our own assets up for sale here in this basin in 2015," Payne added of a small package of acreage in central Pennsylvania the company began marketing last year.

Huntley & Huntley CEO Keith Mangini said his company was extremely active in 2015 in acquiring small companies to block up the producer's deep rights. Privately-owned Huntley has interests in 600 wells across the country, with most in Southwestern Pennsylvania, where it participates in Marcellus wells. Mangini said the deals his company made were opportunistic, completed at a point when natural gas prices were higher than they are today.

"We spent a lot of time in 2015 buying a lot of companies that were smaller than us, largely to get the deep rights," he said. "I did a few acquisitions of production last year, thinking that was the opportune time at what I thought was the bottom of the gas market. I thought I did some pretty good deals, but not as good as if I would have waited until prices collapsed like they did in November of this past year.

"Now is the time to be doing acquisitions in my opinion," Mangini added. "You know I've been through a bust before and it creates opportunities. It's now time to be buying production at these strip prices instead of going through the drill bit."

Mangini continued by saying that there's a lot of capital "sitting on the sidelines" in private equity that's only now being unleashed after a quiet 2015. Charles Schliebs, founder of Pittsburgh-based M&A consultancy Stone Pier Capital Advisors, agreed. He noted a series of transactions that began in late 2015 that has continued this year.

In December, a group of former EQT Corp. executives secured $250 million to start Lola Energy LLC, which plans to focus on the Marcellus and Utica (see Shale DailyDec. 9, 2015). Private equity firm Denham Capital Management LP is backing the company. American Petroleum Partners LLC recently announced a commitment of up to $800 million from Apollo Global Management LLC to focus on Appalachian exploration (see Shale DailyMarch 24).

Gastar Exploration Inc., meanwhile, expects to close the $80 million sale of its Marcellus and Utica assets in West Virginia with Tug Hill Inc. in early April (see Shale DailyFeb. 22). Range Resources Corp. also just announced the closing of a $110 million sale of non-operated properties in Northeast Pennsylvania (see Shale DailyMarch 29). Private equity is again entering Appalachian joint ventures, as evidenced by a deal announced this year by Rex Energy Corp. to better develop its Marcellus assets in Pennsylvania (see Shale DailyMarch 2).

"Private equity has been important in this basin for quite sometime, especially to the modern shale gas era," Schliebs said. "There's a lot of activity still, and there's a lot of activity that's going on that you haven't heard about, that hasn't been announced. So, we'll see what happens as we continue on throughout 2016."

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