Exploration activity, including crucial seismic and reservoir characterization, work may not be as brisk it was before the supply-demand imbalance crushed commodity prices.
But companies that still have buying power should look closely at these areas to avoid potential investment pitfalls when looking to acquire acreage to quickly boost revenue, according to panelists speaking Sept. 23 during King & Spalding’s energy forum in Houston.
Undeveloped land can have an upside, according to Ryan Bouley, managing director of Opportune LLP.
“It’s land that people haven’t spent a lot of time looking at that may go with the transaction. … There can be real value there,” Bouley said during the forum, which was simultaneously webcast. But in today’s market, when investors’ attention is predominately focused on producing assets, trying to put a value on undeveloped acreage—including proved and probable reserves—can be difficult.
Bouley compared it to making a bet on real estate.
Crucial to any undeveloped acreage transaction is getting ahold of seismic data, he said.
“A lot of times companies will go out and shoot seismic data on assets that they just haven’t developed,” Bouley said.
Don’t expect companies to give away that valuable, expensive to collect data, he warned, however.
“In an environment where [some companies] are looking to unload assets and seismic exists, that is something that should always be asked for and closely examined,” Bouley said.
He also had advice for sellers looking to make cash on undeveloped acreage: Look at neighboring operators, including those with adjacent acreage.
“It gives them opportunity to capitalize on economies of scale and roll out their exploration and production activity into an area in which that they are already operating,” he said, adding such deals could result in sizable cost savings.
Despite the potential for deal-making, M&A activity is not as robust today as it was about a year ago when oil prices were above $100 per barrel.
As a result of the commodity price decline, there has been a dramatic shift in the activity level and the types of transactions globally, said John-Paul Hanson, managing director for Houlihan Lokey. He described the M&A activity of 12-18 months ago as healthy and robust.
“Today there is much more activity around trying to extend liquidity, determining what methods companies can deploy in order to extend the liquidity runway, pulling levers from a capital structure perspective,” he said.
The A&D transaction tally in the U.S. between Jan. 1 through Sept. 30, 2014, was 106, he said. That number plummeted to 13 between Jan. 1 through June 30, 2015, and many of the transactions were below $50 million.
However, a recent string of deals could signal a reawakening, and doing so at bigger values.
- Encana Corp. agreed to sell its Haynesville natural gas assets in North Louisiana to a subsidiary of GeoSouthern Energy Corp. and GSO Capital Partners LP in an $850 million.
- W&T Offshore agreed to sell its Yellow Rose Field in the Permian Basin to Ajax Resources for $376 million.
- Memorial Resources plans to acquire acreage in Louisiana’s Lower Cotton Valley from a Rockcliff Energy–QLS Joint Venture LLC for $283.8 million.
“Companies are going through a process to high-grade their assets,” Hanson said.
But the companies with healthier balance sheets are being strategic about which assets they are pursuing, added John Crespo, corporate partner for King & Spalding.
“They are not buying for buying sake,” he said. “They are looking for particular assets that will have an immediate impact on their revenue income with the least amount of integration difficulty.”
Typical areas of hot pursuit, for some companies, include additional service offerings—either through products or services that don’t have already or a niche that would enhance the company’s offerings, he added. Others are looking to expand their geographical footprint.
Velda Addison can be reached at vaddison@hartenergy.com.
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