Jessica Morales here joined by Nissa Darbonne. Nissa, we are going to talk about the 2019 trends. It’s hard to believe that 2019 is ending. Let’s look at the private equity trends you have seen this year.
This year there's been an influx of intra-private equity fund portfolio consolidation. The big one will be inter-private equity fund consolidation. That is big Fund A, big Fund C, B and D. That is combining across their portfolios. One-off companies. This one fits with that but they're in two different private equity firms. That's a much bigger hurdle because you know you have no territorial type things and who's going to come out the winner is it going to be Fund A’s portfolio company or Fund B’s. Private Equity firms themselves intra-portfolio have been consolidating operators. Many that I've spoken to this year increasingly as each month has ticked off the calendar, I'm encountering more and more who would be selling by now they've put together great assets with the traditional model. But, there's just not the market because the traditional buyer has been shut down by investors. So we've had intra-portfolio citations within private equity and their expectations to begin seeing inter-portfolio.
Do you see that continuing into 2020? Or is that a wait-and-see as well.
Yes, with current commodity prices and the current Wall Street investor sentiment toward any additional acquisitions, inorganic growth by publicly held operators. As long as that continues then yes consolidation within and among private equity portfolio companies is likely to continue into next year.
What about rig counts? What have you seen there this year?
There's a great deal of lamenting about declines in rig counts. However, the operators I've spoken to, many of them the biggest ones really with the most rigs out there they have may have started this year with let’s say 24 rigs and they are at this point down to 12 or even 10. One traditionally would look at that as reflecting commodity prices, as state of industry as being dreadful and poor but instead, they're dropping rigs because they are doing these massive drilling spacing units DSUs where they may have four rigs lined up side-by-side and they’re drilling so many wells in that one pad they're focusing all their attention to this. Then, of course, they're going to follow that up with enormous zipper fracs. These are pads with 32 or more wells that's a lot to work on. You’re doing it with four rigs versus having 12 rigs and focus on these DSUs vs. 20 or 24 rigs kind of spread all across your leasehold so you know this industry is constantly changing and I have observed very recently that I think maybe we should stop looking at rig count entirely as a proxy on industry particularly at this time while rig counts are declining a little bit. Instead, some of that decline is most likely due to these operators drilling these massive cube's, pads, units. Everyone seems to want a different name for them these days.
Let’s talk a little bit about G&A trends. What have you seen there, Nissa?
With G&A, operators are operating with a minimal G&A and that is just overhead. That's not adding oil and gas reserves but although the G&A does contribute to that. It is one means of kind of making your company look better to investors, look better to buyers. So this year there is this one operator for example, that cut quite a few people and it is has a very large number of employees in the first place but it is pretty remarkable what their projection for pairing this G&A in terms of personnel will reflect in total savings and however, another operator and the savings were significant. However, another operator I spoke to described how at some point just pairing G&A doesn't do the job. At some point, there are people you need. The more complicated the rock you operate in, the greater your cost on G&A. Operators are looking at that on an ongoing basis clearly they will be looking very hard at that after 2014. Many of them, they’ve cut all they can. They can't really cut much more. There will be more, particularly as there is more pressure amongst companies to consolidate, pairing G&A will be a large factor particularly as the trend right now is mergers of equals on a 50-50 basis there's really no premium associated with it. There is probably tremendous G&A savings there that goes straight to the bottom line.
Top business/investing articles from 2019:
- Smid-Cap Oil And Gas Stocks At Bargain Prices
- Brigham Minerals Tests Market With $100 Million IPO
- Laredo Petroleum Cuts Staff, Replaces CFO Amid Shareholder Pressure
- Floyd Wilson: Wildcatting Has Changed
- US Shale Producers Could Face Another Bankruptcy Wave
- Private Energy Capital: Famine Or Feast?
- Sanchez Energy Files For Chapter 11 Bankruptcy Protection
- Deal Doldrums Lead To Low-Key Energy Lending
- The PE-Backed E&P, v.2019
- Investors Starve US Shale Drillers Of Capital
- Heard On The E&P PE Front: ‘Gloom,’ ‘Doom’ And ‘Dead’
- Analyst: ‘Generalist Investors Are Running Away’ From Oil And Gas
- Executive Q&A: Of Capital And Consolidation
- Downshifting To Make It Through 2020
- Chesapeake Arranges For Loan Up To $1.5 Billion, Shares Rise
U.S. oil output growth is expected to slow over the next five years, likely prompting oil majors to "gobble up" smaller shale oil producers, Mark Papa told Reuters.
To everything there is a season, and while others might find this a time to scatter stones, this disciplined and prepared E&P is busy gathering them. The principals of Lime Rock Resources talk strategy, A&D and practiced patience.
Schlumberger, Halliburton and Baker Hughes reportedly kicked off the new year by putting units up for sale, as the three largest names in oilfield services adjust to falling demand.