American Oil and Gas Reporter - July 2017 - 46

SpecialReport: Industry In Motion
as under-levered at less than three times debt to cash flow, but
not all of those equities trade at a price that will allow them to
be the preferred buyer of noncore assets. "There is a big role for
private equity in a dislocated market like this," he remarks.
Herring sees continuing opportunities for private equity
capital to help publicly traded operating companies develop
some of their core acreage at a more accelerated pace. "We also
have seen the concept of drilling companies pop up and we will
see some companies shedding legacy acreage positions to focus
on what they deem to be their core acreage in today's environment."
As an example, he points to some larger independents that
have been selling legacy positions in East Texas to private
equity during the past nine months to allow them to concentrate
capital investments in resource plays such as the Permian's
Delaware Basin and the STACK and SCOOP in Oklahoma.
"That is a healthy trend for balance sheets to get right-sized on
the backside of 2015," Herring offers.
One of the moves Tailwater has found most attractive is acquiring and leasing noncontrolled positions in key areas with
active drillers. By default, they essentially are partnering with
expert drilling and production companies in those areas. "Our
portfolios end up with a lot of effective operators in them,
which provides a lot of diversity for us," he says.
Win/Win Opportunities

Tailwater focuses on finding win/win opportunities, according
to Herring. "It is hard to put capital to work in the energy
business unless there are winners on both sides of a project."
He explains that his team looks for situations where operators
can offer a best-in-class set of management experience, operating
capabilities and capital as partners, and where someone else
can win on the back end as well. "It is such a large and diverse
market that anything other than that has a hard time being repeatable," Herring says.
One of the most successful win/win strategies for Tailwater
is to partner with independents that control a lot of acreage, but
lack drilling capital. "We partner with them to focus on the
midstream part of the equation to free up capital for the upstream
equation. This creates best-in-class, third party-owned systems
that can attract volumes from others to anchor the midstream
assets," Herring relates. "That is a real opportunity for a
negotiated win/win."
Tailwater's midstream private equity focus complements its
investment opportunities in the upstream sector, he goes on.
"To be a good midstream investor, one has to understand the
rock, particularly if you are doing upstream adjacent midstream
investing," Herring states. "There is no better way to understand
what is happening in a basin than owning an interest in those
basins. We view this strategy as being highly complementary
to our midstream franchise. We currently own interests in approximately 500 wellbores across our active basins."
According to Herring, upstream companies get paid on reserve
replacement and reserve development. Midstream companies get
paid on volume and throughput. Partnering with a specialist that
46 THE AMERICAN OIL & GAS REPORTER

can provide midstream solutions can free capital for the valuedriving engine in the area, creating an opportunity to turn a cost
center into an asset he explains. "There is nothing like a major
correction in oil prices to provide focus on the core value drivers
for each segment of our industry. We would encourage people to
think about that."
A&D Activity

Recent acquisitions by EQT Corp. and Oxy Oil & Gas are
great examples of large deals designed to create a dominant position within a target basin, says Chris Atherton, president of
EnergyNet.com. By agreeing in mid-June to acquire Rice
Energy for $6.7 billion, EQT was able to greatly expand its
core position in the Marcellus and Utica shale plays in the Appalachian Basin. Atherton notes that Rice was originally a
private equity-backed company, which later went public to
provide liquidity to its private investors.
"This was a giant deal, one of the largest in a number of
years," Atherton observes. "I expect to see more companies
growing strategic positions through acquisitions and mergers
like this one. There is a lot of land to cover and there is definitely
a benefit to having a larger company operating the assets."
Meanwhile, Oxy has been consolidating its San Andreas position for some time, says Atherton, culminating in a recent
deal to acquire Hess Corp.-operated carbon dioxide enhanced
oil recovery assets in the Permian Basin.
"Oxy is now the dominant player for CO2 EOR," he says.
Oxy has so much acreage in the Permian that there is probably
much of it that the company will not be able get to in a timely
manner," he notes. "It makes good sense for Oxy to consolidate
around its EOR operations with the Hess deal."
Oxy paid $600 million for Hess's EOR assets in the Permian.
In a separate deal, Oxy announced, it is divesting of nonstrategic
acreage to raise the funds for the Hess deal. "Companies are
choosing to high-grade their portfolios, and doing so with a
noncash outlay is quite smart," Atherton evaluates.
In another recent deal, Encana reached an agreement to sell
its Piceance Basin natural gas assets to Caerus Oil & Gas,
which was formed in 2009 to invest in conventional oil and gas
properties with private equity backing from Oaktree Capital
and Anschutz Investment. The deal makes Caerus the dominant
player in the basin, says Atherton, and includes 550,000 net
acres of leasehold, more than 4,000 producing wells, and some
7,000 future drilling locations.
"The $735 million cash transaction was one of the largest,
particularly for a private-equity backed firm," he adds.
Beyond the mega deals, there are a lot of nonoperated
interests trading hands, Atherton reports. "It can be a good
strategy to partner with a really strong operator or deploy
capital alongside a basin-dominant player," he says.
Laser-Focused Strategy

"Access to capital now really depends on a very specific
strategy," Atherton offers. "You cannot just say you are going
to buy assets in the Permian Basin. Everyone is trying to do
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American Oil and Gas Reporter - July 2017

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