American Oil and Gas Reporter - June 2017 - 78

SpecialReport: Permian Basin Profile
changed. For example, the land grab in
the Delaware Basin, Midland Basin and
SCOOP/STACK among larger publicly
traded independents (including Parsley,
Pioneer, Anadarko, Encana, Newfield
and Cimarex) has allowed companies to
acquire positions with the thought of
trading some acreage to other companies
to consolidate positions and put all their
pieces of the acreage puzzle together.
One company may have a big block of
acreage but has a puzzle piece that does
not fit or see acreage somebody else owns
that helps them complete its puzzle. The
operating companies are trying to consolidate acreage in core areas to have contiguous
blocks of leases they can develop with
fewer encumbrances. In some cases, companies may even buy properties they know
will be valuable to somebody else so they
can use them for bargaining leverage in
future trades. Making a strategic move
here or there to pick up properties of
interest to other companies can be a valuable
negotiating chip as an operator works to
assemble its own acreage position.
In other emerging trends, initial public
stock offerings are happening again in
the upstream and these companies can be
expected to be more active and aggressive
in the A&D market. Examples include
IPOs for Vine Royalty, Kimbell Royalty
Partners, Vantage Energy, Jagged Peak,
Centennial, Blackstone, Indigo, Covey
Park and Haymaker among others.
There is usually an arbitrage in what
the public market valuation is on those
companies and what their assets are trading
for. If a company's stock is trading at so
much per net acre or so much per flowing
barrel a day or so much per increment of
reserves in the ground, acquisitions of
assets that are at a discount to that trading
value are immediately accretive to the
stock price. If a stock is trading at $10
and those companies can acquire assets
effectively discounted at $7, such an acquisition makes a lot of sense. Consequently, companies that are doing IPOs
should become active players in A&D activity.
Diverse Food Chain
The food chain in the A&D business
is much larger and more diverse now
than most think. Conventional wisdom
holds that small companies almost always
sell assets to larger companies, but that
is no longer necessarily the case. While
that trend certainly continues, it goes
both ways now. Large companies are

78 THE AMERICAN OIL & GAS REPORTER

selling big packages of assets to smaller
companies that are just starting out or
growing their portfolios. Instead of always
assembling a team and organically building
up assets and selling to larger companies,
private equity companies are buying each
other. We see a lot more dynamics in the
food chain than conventional wisdom realizes. If each of the 20,000-plus qualified
buyers in the market were major league
baseball players, they would equal the
number of every player who has ever
played professional baseball.
In other developments, the vast majority
of Chapter 11 restructuring work caused
by the severe commodity price downturn
that began in late 2014 is concluding.
Samson, Ultra Petroleum, Halcon Resources, Goodrich, Sandridge, LINN, Energy XXI and Chaparral all have reemerged from bankruptcy and are getting
back to business, taking an increasingly
active role in A&D markets.
Those companies have finished restructuring their balance sheets, likely
raised new capital, and have new boards
and management teams in place. For example, Joe Mills is now president and
CEO of Samson and Douglas Brooks is
heading Energy XXI. These companies
are in the process of examining oil and
gas properties to get back to business.
The major oil companies and largecap independents are conducting largescale portfolio rationalizations that will
likely continue through the end of 2018.
Decisions were made in 2015-16 to divest
assets that would not make sense for
these larger entities to own at $20 oil or
$120 oil. Capital is being directed to the
most impactful projects. Consequently,
assets or positions in basins that do not
meet the hurdles are candidates for divestment. After the land grab of the past
36 months, basin-dominant operators are
beginning to shed their second- and thirdtier acreage positions to concentrate capital
on their core assets, leading to enormous
buying opportunities for the rest of the
market, including for smaller privately
held independents.
Basin-dominant operators with an
enormous amount of acreage and drilling
locations have been going through the
process of examining when they planned
to develop properties, how much capital
those projects required, and how much
time development would take. Some wells
may be scheduled to be drilled in 15
years or 30 years, basically providing
little present value to those companies.

As a result, we are seeing large companies
continuing to rationalize their portfolios,
divesting acreage that could have tremendous potential for other players.

Investment Strategies
While the Permian Basin and the
SCOOP and STACK plays seem to dominate headlines, a wide-ranging set of investment strategies continues to exist in
the oil patch. In order to obtain investment
capital, companies must commit to specific
strategies they believe will work and in
which they have expertise. The most successful buyers are often laser-focused on a
specific region such as the Powder River
Basin, Denver-Julesburg Basin, Kansas,
South Texas, East Texas or Mississippi,
or a particular category of operating expertise
such as producing minerals, nonoperated
working interests, horizontal San Andres
development, waterflood projects, etc.
The oil and gas food chain is massive
and there is a misconception that only
activities occurring in the hottest plays
are the most economic, but all players
raise debt or equity, including smaller
companies that also raise funds from
friends or family. Everyone has to have
a strategy that provides a competitive
advantage in their given area of activity.
While some dominant basin players may
focus on the high-potential Permian or
SCOOP/STACK assets, others are finding
advantages in developing properties or
reworking conventional reservoirs on the
Gulf Coast, Kansas, Alabama, East Texas
and elsewhere.
In other developments, royalty and
mineral A&D is vying for a bigger audience and a bigger stage. Publicly traded
royalty companies are becoming more
prevalent. Viper, Blackstone, Prairie Sky
and Kimbell are publicly traded royalty
companies, and more are likely on the
way. Historically, A&D activity in the
mineral and royalty space has always
been active, but Wall Street is demonstrating a growing appreciation for the
segment.
A high volume of deals trades hands
each year, but the vast majority of these
deals-99 percent of all deals transacted-
are valued individually at less than $20
million. By their very nature, there are
thousands of owners of mineral and
royalty interests, and the value of each
owner's interest is relatively low. There
are hundreds of companies that serve as
royalty aggregators. Consolidating the
royalty or mineral space is effectively

American Oil and Gas Reporter - June 2017

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