March 2017, Vol. 244, No. 3

Features

M&A Suggests Positive Year Looms for Shale

Oil prices aside, the year ahead for shale oil plays in the U.S. appears to be bright. Andrew Dittmar, an upstream analyst at PLS, a Houston-based information and transaction advisory firm, believes we are already seeing or soon will see signs of a positive year for activity and production throughout the Permian, Bakken, Eagle Ford and SCOOP/STACK plays of the U.S.

PLS recently released a 2016 review assessment and 2017 primer of the merger and acquisition activity possible throughout nearly every U.S. shale play. Compared to 2015, the M&A market increased by 117 percent in 2016. Brian Lidsky, managing director at PLS, said during the downturn in oil prices that started in 2014, the industry focused on three areas: decreasing costs, increasing recoveries and performing capital discipline. Those efforts during the downturn have helped shift the price at which oil producers need oil to trade at in order to maintain profitable—the breakeven price—to much lower levels than in 2014.

PLS’s review of M&A activity clearly shows that of all the regional specific shale plays in the U.S., none has seen as much interest or investment as the Permian Basin of West Texas and Eastern New Mexico. The Delaware Basin, an oval-shaped portion of the Permian’s western edge, was proclaimed “the play of the year” by PLS. Fresh equity poured into the region last year to the tune of $18 billion as companies moved in to buy Tier 1 acreage in the counties of Reeves, Pecos and Loving. According to PLS, those buyers fortunate enough to be on the winning side of a Delaware Basin purchase should be well positioned in a rising oi price environment. Until a full recovery happens, producers there should be more equipped to thrive at current prices as anyone in the U.S. Breakeven economics throughout much of the region are well below $40 per barrel and moving product to market is much cheaper than other places.

Deals in the Permian and the Midland Basins accounted for 39 percent of all deals that happened in 2016, according to PLS’s data. Dittmar said his team could see the moves piling up throughout the year and they knew before their recent assessment of 2016 had been released that the big story of the year would be the amount of activity that took place in the Delaware. “People knew there was a lot of oil there [in the Delaware],” he said. “It has the same stacked pay zones as the Midland but it is a little more technically challenging and it took them longer to crack the code on it.”

In 2016, he added, “it looks like they cracked that code.”

The ability, or new understanding, of unconventional oil producers to work through the challenges of the Delaware essentially created a land rush in 2016. According to Dittmar, acreage costs went from less than $10,000 per acre at the start of 2016 to a range of $30,000 to $50,000 per acre by the end of the year.

The rush in the Delaware happened for multiple other reasons as well. Entering the Delaware was easier for new entrants or players to the region, as opposed to the Midland Basin which has a long history of oil production by established operators. The areas also had already commenced unconventional development prior to 2014. Wall Street was also very receptive to provide private equity to companies looking to acquire massive acreage blocks, Dittmar said. “Companies have been able to fund larger deals through equity, as opposed to cash on hand or going to their credit lines,” he said.

Although the Permian dominated 2016 for the M&A activity storyline, Dittmar expects the other major plays to make headlines in 2017. Deal activity in both the Bakken and the Eagle Ford climbed in 2016 compared to 2015. “We expect those plays to be big winners when we come into 2017. As confidence builds in oil prices that we are going to hold above $50/b, we are going to see more interest in the oil plays and there will be less to buy in the Delaware Basin,” Dittmar said.

“Buyers are going to need to look into other plays. They are cautiously optimistic. They don’t want to be left behind on a great buying opportunity as we move into higher prices,” he added.

Already, the signs are there that value exists in places like the Bakken or Eagle Ford. Oasis Petroleum, a Bakken pure-play operator was able to raise private equity from Wall Street overnight for the purchase of a large bolt-on acreage block. (The seller in the deal, SM Energy, is selling all of its Williston Basin assets to focus solely on the Midland Basin, where it has acquired several new assets throughout 2016). Enerplus, a Calgary-based operator also largely leveraged to the Bakken, was also able to sell some acreage for a high value, another sign that acreage values have recovered in places other than the white-hot Permian, Dittmar said.

Advancements in reservoir analysis, completion strategies and drilling efficiencies will also help make 2017 a good year for shale. Such advancements will allow some companies to focus on more than just what they consider Tier 1 acreage. Good well results that match the necessary initial rate of return metrics for wells drilled and completed on prime acreage can now happen on Tier 2 acreage, something Dittmar said operators didn’t think was possible in 2014 or 2015.

In addition to its recent M&A assessment report, Dittmar’s team keeps an updated database of the largest deals or volume of deals throughout every play. “We look at these deals every day. We see them as they come out. We have a good feel of what a final report will look like.” Although the 2017 report hasn’t been written yet, the signs point to a positive year for shale, he said.