American Oil and Gas Reporter - June 2018 - 40

SpecialReport: A&D And Finance
The market initially gave thumbs up
to RSP Permian, and analysts are quick
to suggest that if oil prices continue to
trend upward, it will be an even bigger
win for all shareholders. Raymond James
has maintained its buy rating on Concho.
The Raymond James first-quarter 2018
earnings reports reiterated its "strong
buy" in place for multiple years, according
to Graham Price, senior exploration and
production equity research associate. In
that note, the firm also reiterated its target
price of $246 a share.

based transaction adviser that tracks energy-related acquisitions and divestitures.
"There are a number of small or midsize public companies operating in the
Permian that would benefit from merging
or selling to a larger operator," he says.
"As larger companies, they may be able
to negotiate better deals with service
providers and get more access to infrastructure. But the primary benefit is getting
big, blocky chunks of acreage where they
can drill 10,000 foot laterals, then walk
the rig 660 feet and drill another as part

"There are a number of small or mid-size
public companies operating in the Permian
that would benefit from merging or selling
to a larger operator.

"

ANDREW DITTMAR
Senior M&A Analyst
PLS Inc.

Concho's Leach says the deal makes
sense as both companies-and the Permian
as a whole-transition to intense development.
"The efficiency we can gain through a
bigger balance sheet and a bigger program
is driving this transaction," he summarizes.
RSP CEO Gray echoes that sentiment.
"As RSP has grown and we have seen
the resource play develop, we have come
to recognize that combining with a company with the scale, investment-grade
balance sheet and operational excellence
of Concho will unlock even more value
for shareholders. The combined company
will have the vision and necessary financial
strength to efficiently develop the tremendous resource potential of these assets
with large-scale projects," he concludes.
Consolidations To Come
The Concho/RSP merger is but the
first of many consolidations likely to
occur in the Permian Basin, predicts Andrew Dittmar, a senior merger and acquisition analyst at PLS Inc., a Houston40 THE AMERICAN OIL & GAS REPORTER

of a continuous development program."
In addition to looking at possible mergers, operators are engaging in small-scale
trades and bolt-on acquisitions to create
acreage blocks, Dittmar reports.
"There is a drive for companies to become 'pure plays,'" he says. "In the past,
the stock markets favored diversified portfolios, but today they want companies to
focus on one or two regions. It is easier
for the more focused companies-especially
those in top-tier basins such as the Permian-to live within cash flow and allocate
capital efficiently."
Capital efficiency has become key for
public companies, Dittmar observes. "At
the Oil & Gas Investment Symposium in
April, almost every company pointed out
that its executives' compensation was tied
to shareholder return metrics rather than
growth," he reports. "Investors no longer
want to see growth for growth's sake.
Growth still occurs, but only as part of
the puzzle for shareholder returns."
As companies look to become pure

plays, they have put noncore assets on
the market, Dittmar notes. A case in point
is Pioneer Natural Resources, which has
announced plans to sell its Eagle Ford,
Raton Basin and Texas Panhandle assets
to become a Permian Basin pure play.
Including the $9.5 billion merger between Concho and RSP, Dittmar says the
upstream industry conducted $21 billion
in deals during the first quarter. "If we
take out that merger, activity is in line with
the past few quarters. The market is active,
but not to the extent we saw in late 2016
or 2017, when there was a rush to acquire
proven assets in the Permian," he allows.
"In most mature plays, such as the Eagle
Ford and Bakken, there are more companies
looking to shed noncore assets than there
are logical buyers for those assets," Dittmar
assesses. "The public companies in those
plays have large enough positions that they
are comfortable with their portfolios and
mostly are not looking to expand them.
That is making private-equity-backed companies cautious about deploying capital
there, since their exit strategy often involves
a sale to the public companies."
In theory, private companies could
generate the high returns their backers
require through initial public offerings.
However, even with oil prices in the $60$70 range, many investors are wary of
the upstream segment, Dittmar indicates.
When deals occur, Dittmar says the
prices tend to be reasonable. "Sellers
have an incentive to divest assets so they
can allocate capital to higher-return plays,
but their balance sheets are strong enough
that they can wait for deals that work for
both parties," he explains.
Marketing Assets
With oil prices trending upward, now
is good time to sell assets, asserts Matthew
E. Meagher, president and partner at
Meagher Energy Advisors, an M&A advisory firm with offices in Denver and
Tulsa. "The market is the healthiest it
has been in three or four years," he declares. "With stronger oil prices, sellers
know they can get good deals, so there
are more projects going to market."
American Oil and Gas Reporter - June 2018

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