The paradox of the 2015 A&D landscape is that few deals have been made in the first quarter but the market is famished for them.
Deals plummeted in the first quarter of 2015 to nine valued at $1.1 billion, down from 33 deals in fourth-quarter 2014 valued at $13 billion, said Chris Simon, managing director and head of A&D for Raymond James.
Still, Simon said operators are now reaching “hedge cliffs” and will begin to fully experience lower market prices. Fall 2015 borrowing base redeterminations could also be tougher than those in the spring, leading to an active A&D market in the second half of the year.
The largest asset deals in the first quarter of 2015 include:
- Energen Resources Corp.’s (EGN) sale of their San Juan Basin assets for $395 million.
- Southwestern Energy Co.’s (SWN) East Texas divestiture, $218 million.
- HEYCO’s Delaware Basin sale, $137 million.
“Many companies are looking to consolidate through corporate M&A,” Simon wrote in Raymond James’ A&D Quarterly, released May 1. He added that there is a “huge buyside demand.”
Many companies are eyeing consolidation through corporate M&A, and private equity might be the most active bidders for these divestments.
“Billions of dollars of energy-specific capital are currently being raised in anticipation of upcoming M&A activity,” Simon said.
Some A&D opportunities will be driven by over-levered companies divesting noncore assets for cash to pay down debt. Distressed deals are starting to emerge and will accelerate as borrowing bases are redetermined, Simon said.
Buyers are mainly focused on core-of-the-core buys with “private equity ready to pounce.”
Deal activity will depend to some extent on the size and structure of companies.
Large-caps
- If selling, they are divesting noncore assets
- Freeing up capital for higher return core assets
- High-grading drilling opportunities
Mid- and Small -aps
- Healthy companies have high-graded, refracking by some
- Many looking to consolidate through corporate M&A
- Highly-levered companies cutting costs, managing potential borrowing base reductions
Private Equity
- Generalist PE Firms looking to invest during the down cycle
- Teams that have been on the acquisition sidelines now getting on the field
- Funding nonop and royalty/mineral acquisition business plans
- Looking for creative ways to place capital, such as joint venture (JV) carry structure
MLPS
- A few healthy MLPs with good liquidity and strong appetite for assets
- Many unable to issue equity to buy due to high yield
- Others looking to combine or are seeking alternative financing vehicles
Nonops
- Newer, diverse groups including industrials have entered market
- Strategic management teams not interested in staffing up with new operating teams have been backed by private equity
- Willing to enter into JV carry structure and carry operators with attractive PUDs
Distress
- Commercial banks getting more attention from federal regulators to manage portfolio credit risk
- Distress is starting to set in
- Bankruptcy filings have begun
“Deals in the market are in high demand,” Simon said. “Expect some corporate deals with stock as currency.”
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