High yield exploration and production (E&P) companies are consolidating
their US shale acreage plays as oil prices have signaled some
stabilization since earlier this year, according to Fitch Ratings.
Companies executing recent acreage deals include SM Energy, RSP Permian,
Oasis Petroleum, Carrizo, and others.
Variance in bid/ask spreads, a closed high yield bond market, tighter
bank lending requirements, and depressed equity valuations had hampered
attempts to purchase assets. But with spot WTI prices around $50/barrel,
supported by fluctuating sentiment on a potential OPEC deal, and
investor enthusiasm on the upswing, high yield E&Ps have become
proactive, if not aggressive, with regards to size, scale and the price
they are willing to pay to consolidate their acreage positions.
Several acreage transactions priced above historical trends were
announced over the past few weeks. Fitch believes that with stabilizing
oil prices, this trend will continue as companies look for asset
acquisitions to increase production more efficiently. Deals announced so
far have been partially financed by equity, which should have a credit
neutral impact, specifically for Oasis Petroleum and RSP Permian.
There are clear benefits to owning core acreage in a single location as
opposed to holding small pieces in multiple plays. First, high yield
E&Ps, which are generally higher cost operators on an all-in basis, can
harness greater efficiency benefits in continuous or adjacent acreage
positions as technological advancements in drilling, completions and
production are implemented. Second, in the current cost sensitive
environment, high yield E&Ps no longer have the luxury of time to
overcome a learning curve while familiarizing themselves with the
geological vagaries of a previously unknown play. They can immediately
deploy expertise in a known location, harness strong well economics, and
generate attractive returns.
The Permian Basin still dominates most of the acreage consolidation
transactions due to lower break-even costs, existing infrastructure and
multi-stacked plays that respond favorably to horizontal drilling.
Earlier in 2016, the average acreage size for Permian deals tracked by
Fitch was 14,000 acres, with average consideration of approximately $400
million. Recently announced deals include; SM Energy's $1.6 billion
purchase of 35,700 net acres in the Permian, which will be partially
funded by an equity raise as SM is targeting the Permian as its core
operating location. RSP Permian's $2.4 billion deal to acquire two
entities that own 41,000 net acres in the Permian is also notable.
Fitch has not only observed a jump in the size of deals, but some
activity outside of the Permian Basin such as the Bakken and the
Eagle-Ford. Specifically, in a concurrent transaction, SM divested its
Bakken assets to Oasis Petroleum, which is acquiring 55,000 net acres
from SM in the Williston Basin. Oasis will finance the $785 million SM
acreage with an equity offering. Equally strategic is Carrizzo's
purchase of additional Eagle Ford acreage, also funded with equity.
However, Fitch's view is that some valuations are starting to look full,
particularly in the Permian, as companies like SM Energy and RSP Permian
will pay over $40,000 per acre.
High yield shale focused E&Ps who strategically core up their economic
acreage in a credit neutral manner are viewed favorably, all else equal.
Given valuations on recent transactions, particularly in the Permian
Basin, the ultimate returns from these recent acreage consolidation
deals will depend on a solid recovery in oil prices.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
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