Stealing the Permian- Which operators are next in line for US onshore mergers and acquisitions activity?

US onshore merger and acquisition activities over the past few months have been mostly focused on the Permian Basin. Our company and transaction experts, Sven del Pozzo and Tim Brown, have assessed US E&Ps to understand what might be ahead for the Permian, and other U.S. operators looking to enter or acquire assets in the Permian. Our team discussed opportunities on our most recent episode of Upstream in Perspective. Here's an excerpt from the discussion:

Jessica Nelson:

Let's talk a little bit about your research. Is your research indicating any bargains in the US oil and gas exploration and production sector at current oil prices?

Sven del Pozzo:

First, we have to define a bargain and there's lots of ways to look at that. But, the one we've been noticing lately is a simple analysis of seeing whether the production stream that a company has-the oil and gas it produces-how much it's worth. Then, we compare that with what the stock is selling for, and the debt that the company has. Right now, it seems like not just us, but also activist investors are noticing that there's a number of smaller producers where the value of their production at $50 oil-I should say a present value of their production so discounted in today's dollars-is it trades for almost the same as what their market capitalization would imply, and the book value of their debt would imply.

Basically, if you go out and buy these shares for these select few companies, you're only buying them for the value of their production at $50, which means everything else comes for free. In the case of an oil and gas company, everything besides the production would be non-producing assets, which are reserves, prospective reserves, or unproved reserves that are in the ground, or future drilling opportunities. Those can be worth a lot of money, so if you pick the right ones there certainly are bargains out there. It's just they're not all over the place yet. You have to do your research.

Jessica Nelson:

Over the last 18 months, the Permian Basin had a lot of activity, as operators sought entry or consolidation opportunities in North America's most active oil play. However, Elliot Management's bid for QEP Resources appears to now leave investors very little, if any, options to easily or cheaply take over oil-weighted Permian pure plays. Tell us a little bit about Elliot's pending QEP deal and the Permian.

Sven del Pozzo:

Well, Tim's the expert on QEP. I'll just say a couple things. The reason it leaves investors with few, if any, opportunities is because QEP was one of the only companies that screened for a takeover because it has a relatively small amount of vested shareholders. It's got a lot of production value and its mostly oil, which makes it interesting. It doesn't have much debt, so those kinds of things give it a broad appeal to potential buyers. Basically, the bid price that Elliot is proposing would imply a price of less than $10,000 per acre for QEP's Permian assets, which is a good price.

Tim Brown:

Yeah, Sven, like you said, we think the deal would be a steal at the price that they're offering at $8.75 a share, Elliot's offering QEP. We think it would be a steal for Elliot, which is why we believe QEP has been searching for better offers since the possibility of a deal was first announced in November. Recently, there have been some rumblings that Vantage Energy, which is the company that agreed to buy QEP's Williston Basin assets, may want to renegotiate the offer price of that deal because of the recent decline in oil prices. The oil prices have dropped about 10% since the deal announcement.

At the time of the acquisition, Elliot said it was ambivalent as to whether the Bakken deal went through, so I'm not sure if it will determine whether the acquisition is consummated for QEP, or not. But, any decline in the values of the Williston Basin assets, or the sales price would effectively increase the cost of Elliot's acquisition with QEP. Also, QEP's stock has dropped about 11% below Elliot's bid price recently, which suggests the market doubts whether QEP will find a buyer at this point.

Jessica Nelson:

Do you have a guess there? Do you expect them to hold out given all that information?

Sven del Pozzo:

I mean it makes sense. I mean if it's a steal then QEP should try and look for something else, see who else is interested. It depends how long they want to wait out. Tim, I don't think there's any big shareholders at QEP that can stop this from happening, right?

Tim Brown:

No, they couldn't stop it from happening. I could see why QEP would want to wait because they haven't even finalized the transition to being a pure play Permian yet, and maybe they realize some benefits of that when that finally happens, and maybe that raises the value of the company. At the same time, with the market doubting another buyer's going to come along and QEP maybe wanting to get out as when the goings somewhat good maybe they do accept it. It's up in the air right now. It's really hard to tell which way they're going to go.

Sven del Pozzo:

There's a management transition at QEP also, which is probably another reason Elliot thought it could step in. There's a management shift on the way.

Jessica Nelson:

That lead to the question-if few pure plays remain are there any other steals in the basin?

Sven del Pozzo:

By that method that I describe earlier, basically are you selling for just what your current production is, which logically applies that any future locations that you drill, assuming they're economic at $50, come for free then yeah, we got a few other ones that fit the bill. One of them is Laredo Petroleum. But there's a few things that differentiate it. Tim is also our expert on Laredo, so I'll hand it over to him.

Listen to the full episode of Upstream in Perspective. Learn more about our coverage of the mergers and acquisitions market.

Posted 22 February 2019

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.