Shale land grab tops mergers as buyers await better oil outlook

The buyer’s market that the battered U.S. shale patch has become is so far luring more land purchases than takeovers as investors await a more solid crude price rebound before making bigger moves.

Handshakes between U.S. oil and gas explorers have had more to do with acquisitions of coveted acreage in the Permian Basin straddling West Texas and New Mexico, or Oklahoma’s SCOOP and STACK areas, than agreements to share a head office and a logo.

“People are trying to find the bottom,” said Stephen M. Trauber, vice chairman & global head of energy at Citigroup Inc. “They would rather do a deal when they know they can pay for something and they know the price improves, versus declines.”

A two-year slump in crude prices has sent many producers into bankruptcy, while others slash spending and sell assets to stay afloat. Crude rebounded from a 12-year low earlier this year but is still lingering below $50 a barrel, less than half a 2014 peak. The Permian, the nation’s largest field, has led the biggest and longest revival in oil drilling since 2014 while producers remain more cautious in areas that are less profitable.

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Of the $32.1 billion in deals U.S. oil and gas explorers signed this year as of Monday, 52 percent were asset sales, mostly land in the country’s hottest plays, according to data compiled by Bloomberg. But even in the case of deals that are tallied as takeovers, often it’s the acreage that comes along with the acquisition that drives the buy. To help pay for the bargains, producers have issued a record $20.59 billion in shares so far this year.

Concho Resources Inc. and Newfield Exploration Co. are among producers that bought up areas in the Permian and Oklahoma to consolidate their hold on the lowest-cost shale plays. PDC Energy Inc. joined the race, announcing late Tuesday a $1.5 billion purchase of two companies with holdings in the Permian. While technically a takeover, the deal was mainly about the combined 57,000 acres PDC is getting out of it.

Producers are looking to focus on areas in which they can operate more economically and increase drilling more efficiently, said Sean Coleman, chief credit officer at Franklin Square Capital Partners. At current price levels, that’s a strategy that makes sense, he said.

The asset sales have reached $16.7 billion so far this year, about 69 percent higher than a year earlier but less than half of the volume of sales during the same period of 2014, the data compiled by Bloomberg show. About $7.46 billion of transactions have been in the Permian, compared with only about $1.88 billion in the Eagle Ford, according to PLS data compiled by Bloomberg.

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With debt markets practically closed off for many producers, financing constraints have been a large obstacle for mergers and acquisitions, according to the mid-year Oil and Gas Mergers and Acquisitions report from the Deloitte Center for Energy Solutions.

While a relatively better price environment won’t usher in “a tsunami of deals in the next several months,” we’ll likely see a gradual increase, said said Andrew Slaughter, executive director at the Deloitte Center for Energy Solutions.

The level of uncertainty among buyers and sellers is “probably the highest it’s ever been,” Slaughter said. The timing and extent of the recovery has been difficult to predict, which has made agreement on valuations even harder to come by, he said. And traditional debt markets “will be very slow to open up again.”

Executives at Hess Corp. have expressed a strategic but cautious approach to deals: If they can create growth by tweaking existing portfolios, there isn’t strong pressure to go out and buy.

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“I think these people are looking at targets,” said Hugh “Skip” McGee, chief executive officer at Intrepid Financial Partners. “But I don’t think that they feel the window is about to close, and that they need to jump now.”

An increased level of interest indicates there will be a higher volume of mergers and acquisitions later this year into the next — though likely not many mega-deals, Citigroup’s Trauber said. Consolidation “absolutely makes sense” given how fragmented the upstream industry is, he said. Those waiting on a surge are likely to see an uptick in activity.

In the meantime, the most sought-after assets remain pieces of land in the Permian and the South Central Oklahoma Oil Province (SCOOP) and Sooner Trend Anadarko Basin Canadian and Kingfisher counties (STACK) regions.