Bill Marko: “They were the natural buyers. They’re not in that game anymore.”

Where have all the serial acquirers gone? To big-money unconventional-resource plays where many start-up, private-equity-funded E&Ps can’t handle the long-development-time, negative-cash-flow stories in their business models.

Just a few years ago, a start-up could plan an exit in a few years—or less, at times—to Chesapeake Energy Corp., XTO Energy Inc. and other avid buyers of proven, held-by-production acreage that just needed more wells to become easily meaningful to the public-company portfolio’s investors, who are focused on reserve and production replacement and growth.

Most of the serial acquirers are busy now with their existing unconventional-resource portfolios, says Bill Marko, a managing director for Jefferies & Co. Inc. They’re not buying conventional-asset packages. Chesapeake Energy Corp. is JV’ing, instead. XTO is now a business unit of ExxonMobil Corp. and, while former president Vaughn Vennerberg says XTO continues to look at bolt-on acquisitions, its focused is on unconventional properties.

“They were the natural buyers. They’re not in that game anymore,” Marko says. In the early 2000s, a start-up could build a package, and sell it in a few years. “Raise $50 million of private equity and build a $200-million company, and successfully sell it to Chesapeake, XTO and some of the other (larger, public) E&Ps.”

No more, for now. Instead, conventional-asset-focused, private-equity-funded E&Ps are targets of roll-up E&Ps that have their exit set on the IPO market, instead.

“This has fundamentally changed the private-equity model as the built-in exit to XTO, Chesapeake and others has disappeared. New acquirers are and will emerge, perhaps with more focus toward IPO or acquisitions-focused policies.”

Marko expects both more unconventional and conventional oil and gas assets will come onto the market, as unconventional-focused players seek to raise the $1.5 trillion he estimates is needed to develop North American shale plays during the next 30 years.

“Average that out and it’s about $50 billion a year.”

Equity and debt markets are open to producers seeking capital, and selling conventional assets is another fund-raising option. “But the two combined are not going to be enough to raise the money that’s needed to do all these developments. In the first five to eight years of a major development, there is a time period where you’re cash-flow negative and it is non-self-funding, so you have to raise money from outside sources to develop these plays.”

Owners of unconventional-resource plays are turning to the joint-venture market to provide cash for drilling and to hold acreage. “The market is really parsing into two groups: You have the shale-focused players and the conventional-focused players. I think there’s room for everybody.”

The shale-resource E&Ps have 5-, 10- and 20-year development horizons and the conventional-asset E&Ps may have a two-, three, five- or 10-year horizon.

“You will continue to see deal flow on the resource-focused side and add a lot more conventional assets on the market. Many of the larger companies are seriously focusing on shale-resource plays—Encana Corp., Chesapeake, Devon Energy Corp., Petrohawk Energy Corp. They’ve all done big transformations of their portfolios, some quicker than others, but they’ve been very consistent in their focus.”

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor,, Today, Oil and Gas Investor This Week, A&D Watch,,