More than 300 deal-makers attended the third annual A&D Strategies and Opportunities conference in Dallas recently. Following is some of the insight they received: Know when to exit, said Art Smith, Houston-based chairman and chief executive of research firm John S. Herold Inc. “Sell out early, if you’re not going anywhere.” An example: shareholders of The Wiser Oil Co. would have gotten a better deal had the company been sold several years ago. (It was recently purchased by Forest Oil Corp. for $330 million.) Wiser’s G&A costs were running about $80 million a year, and interest payments took the total to $100 million a year. “They used up $20 per share of value just by staying in business,” Smith said. Profits. About “obscene” profits, Smith said, “How can profits…be obscene?” Asset prices. He added that $40,000 per flowing barrel equivalent is the average price being paid for U.S. assets—twice that of two years ago.
Here’s why: Finding and development costs in the past three years have averaged some $10 per barrel equivalent, while the average price paid for proved U.S. reserves in 2003 was $7.53 per barrel equivalent. (The gap is closing in: Randall & Dewey Inc. reports that the second- quarter 2004 average price paid for U.S. proved reserves was nearly $10 per barrel equivalent. See “Special Report,” beginning on page 4 for more on this.) In Canada, the competition is even tougher, Smith said. “The [deal] values have gone into the stratosphere.” Some recent prices paid were US$16 to US$18 per proved barrel equivalent. RD/Shell.Will Royal Dutch/Shell (NYSE: RD) be bought? “That’s not as crazy as you think,” Smith said. The firm reports that Total SA (NYSE: TOT) is interested in the company. LNG. Tom Petrie, Denver-based co-founder of investment-banking and M&A advisory firm Petrie Parkman & Co., said there will not eventually be a natural gas cartel like OPEC is to world oil supply. Also, he said, liquefied natural gas (LNG) supply will not undermine North American gas-production fundamentals. Sligo Field. Joe Bridges, chairman and chief executive of Houston-based, privately held Greystone Petroleum LLC, and his partners sold their Sligo Field this spring to Chesapeake Energy Corp. (NYSE: CHK). The team had been working on the assets for nearly a decade, and studied the assets even longer. “This field was terribly underrated and it was a real pleasure for Mike [Geffert] and me to get it the recognition that it deserved.” Bridges, Geffert and other Greystone management are giving it a go again. “The Cotton Valley has been a real late bloomer and, in the south end of the field, will be every bit as productive as the north end of the field.” Lake Washington Field. In fourth-quarter 2001, half of Houston-based Swift Energy Corp.’s (NYSE: SFY) U.S. production was from the Austin Chalk with a 35% average decline rate. In early 2002, the company got to work on its Lake Washington Field, Louisiana, acquisition. Within a year, the company’s average decline rate was reduced to 25% and at year-end 2003, it was 20%. Tara Seaman, Swift vice president, A&D and reserves, said the field had 18 wells when Swift bought it; now it has 95. Facilities were a big issue. “They were in bad shape.” Upon Swift’s inspection, the shuttle boat lightly struck the platform. “Something fell off and it wasn’t a pelican.” Swift paid $32 million for the field, and has invested an additional $120 million. It came with 7.7 million barrels equivalent of proved, and the company has added 48 million. “I’m looking to acquire another salt dome [play],” Seaman said. Southern California. Hal Washburn, chief executive of Los Angeles-based BreitBurn Energy LC, said operating in California is not for the faint of heart. He and fellow Stanford University petroleum engineer graduate Randy Breitenbach founded BreitBurn in 1988, and Houston-based Thurmon Andress joined them in 1995. They have 2 billion barrels of oil in place. Some 750 million barrels have been produced, and 40 million barrels of proved remain, so the assets have 1.3 billion barrels of remaining potential. The company was bought this summer by Provident Energy Trust (NYSE: PVX), which was the second Canadian royalty trust listed on an American exchange and is the first to buy a U.S. property. From the BreitBurn assets, Provident gains long-life reserves that throw off stable cash flow. Washburn et al continue to run the BreitBurn business as a U.S. subsidiary of Provident. Going public. Presenters and attendees suggested that going public is cost-prohibitive to many producers today. Arthur Budge, president of Dallas-based, privately held Five States Energy Co. LLC, said, “I cannot understand companies of under $500 million in market capitalization going public.” Budge serves on a non-energy, publicly held company’s board. Howard House, Houston-based managing director of Raymond James & Associates, says some E&P company management feel that going public will slow them down. Tim Murray, Houston-based executive vice president of Wells Fargo, said many of his clients decidedly don’t want to go public. Advisory fees. Doug Brooks, manager, worldwide MA&D of Houston-based Marathon Oil Co., (NYSE: MRO) said of hiring an advisory firm to sell an asset, “In a $1-billion deal, the fees are a very small price [to pay].” Marathon has been busy shifting its asset portfolio to natural gas. “We own 20% of LNG regasification capacity in the U.S. now versus zero three years ago.” VPPs. He added that he expects in the future to see mega-VPPs (volumetric production payments) in the $1-billion range, and “you could see $2-billion VPPs coming. The forward market is beginning to accept that.” Jim Benson, a partner and managing director of Dallas-based Energy Spectrum Advisors, said VPP money can cost 8% to 12%, while private equity can cost 20%. As for prices being paid for U.S. assets, he counted a Rockies deal at $80,000 per flowing barrel equivalent. “I’m sure they’ve seen some upside we haven’t seen yet.” Packaging. Brooks advised to not throw low-end properties in with high-end assets when making divestment packages. George Solich, president of Denver-based, privately held Cordillera Energy Partners, suggested consideration of the divestment approach. “Are you going to shoot with a rifle or a shotgun?” Will you talk to just your friends or to 500 prospective buyers? Petrie Parkman & Co.’s services are rifle-style; general asset brokerages are shotgun-style. He and his colleagues’ office at one time was a Starbucks and a cellphone. “If you can make production go up, then that’s all it takes.” Exit timing. Glenn Hart, president of Houston-based, privately held Laredo Energy II LP, said Laredo may sell again before year-end. The company sold most of its assets, in South Texas, last fall to Chesapeake Energy Corp. “I don’t regret selling too early…We didn’t want to run the risk of a warm winter and gas prices falling…Too late is a [worse] thing.” Dennis Ferstler, president of Houston-based, privately held Alpine Resources Inc., sold to Delta Petroleum Corp. this summer for $122 million. The mostly Gulf Coast assets, primarily all 100% operated, were amassed over a 20-year period. The company started with a $200,000 loan from Southwest Bank. “It was a big one for us, and [Southwest’s] first.” Ferstler and partners kept 100% equity in the company and financed it with debt— commercial debt first and then mezzanine loans—which had been paid off through cash flow prior to the June 2004 sale, so all the proceeds went to equity owners. In December 2003, the company received an unsolicited bid. Because the company didn’t have bank debt, it didn’t have a current reserve report. Ferstler et al walked away from the deal—the law firm representing the unsolicited buyer made it easy, he added. They set out to find a friendly buyer, and—lucky for Alpine’s owners—asset prices went up, meanwhile. “We found Delta motivated to close and had financial strength to get it done,” he said. The first offer included some Delta stock. Alpine declined. “They immediately came back with all cash.” The deal was closed in 16 days from bid opening. Delta had an accommodating legal staff, Ferstler added. PIPEs. Jim Sigmon, president and chief executive of San Antonio-based The Exploration Co., (Nasdaq: TXCO) has used PIPEs—private investments in public equity— to help finance asset expansions. The popular financing tool provides asset buyers with fast cash for closing. In one deal, the South Texas prospector received net proceeds of $15 million and gained a net 9.25 billion cubic feet equivalent of reserves with the funding. The deal was accretive by 85 cents per share. Word from other sources is that PIPE deals often are resulting in higher public stock prices—shareholders are taking note of the private investors’ confidence in the stock. Mature GOM shelf. Glynn Roberts, president of Houston-based privately held Northstar Interests LC, has been grabbing up mature Gulf of Mexico shelf assets during the past decade, particularly with mezzanine money. Why? High advance rates, short payout and accommodation of additional financing needs, he said, such as bonding, exploitation and hedging. Since 1999, the company has grown proved reserves from less than 1 million barrels equivalent to more than 7 million. Institutional money. Joe Foran, chairman and chief executive of privately held, Dallasbased Matador Resources Co. that operates in Texas, Louisiana and New Mexico, raised more than $50 million in start-up capital last year from 200 shareholders, including individuals and major institutions. He and fellow shareholders sold Matador Petroleum last year to Tom Brown Inc. Foran said the best deals are allcash ones. Benson said, “Whether you’re selling a property or financing a deal, create a competitive environment. If you’re a buyer, create competitive financing.”
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