“Private equity is
absolutely critical to
everything we’ve seen
over the last 18-24
months and probably
will continue to be so”
in terms of companies’
ability to raise capital in
asset sales and companies
streamlining their
operations.
—Jim Rice, managing
partner, Sidley Austin
LLP
30 Oil & Gas Journal | Apr. 3, 2017
in today’s environment. As public markets improve there
are additional resources in mending a firm’s balance sheet
alongside refinancing and asset sales.”
Private equity’s role
The one source of funding that has been plentiful over the
past year has been private equity, which has swept in to
provide cash by way of asset acquisitions as well as in the
form of partnerships with operators. Rice believes “private
equity is absolutely critical to everything we’ve seen over
the last 18-24 months and probably will continue to be so”
in terms of companies’ ability to raise capital in asset sales
and companies streamlining their operations. During a typical divestiture process where Sidley Austin is representing
a seller, if his client gets “100 confidentially agreements or
nondisclosure agreements signed up, then 80-85 will be
from private equity or private equity portfolio companies,”
Rice said.
SM Energy Co. has made a few deals with private equity—both as buyer and seller—in its quest to narrow its focus on the Permian. The firm in 2016 spent about $2.5 billion in separate acquisitions from Riverstone Holdings LLC
and EnCap Investments LP to boost its position in the Midland basin. Those moves were, in part, funded by asset divestitures, including its sale of 55,000 net acres in the Williston basin to Oasis Petroleum Inc. for $785 million. SM
Energy then began this year by selling its nonoperated Eagle
Ford assets to Venado Oil & Gas LLC, an Austin-based affiliate of KKR & Co. LP. SM plans to use the proceeds of the
Eagle Ford sale for its $875 million capital program in 2017,
general debt reduction, and general corporate purposes.
SM Energy now has 87,600 net acres in the Midland ba-
sin, by far its largest position. The vast majority of its capital
spending for the year will go toward the Permian, where
it’s slated to drill 100 wells and complete 80. Last year, just
32% of the firm’s $687 million in capital spending was al-
located to the Permian, with 37% going toward the Eagle
Ford and 31% to the Bakken-Three Forks and Powder River
basin.
“Last year, many strategists seemed to be saying ‘let’s be a
core-basin operation,’ taking the approach that they should
put more resources and capital in fewer basins,” Rice said
during a Sidley Austin roundtable discussion in Houston
earlier this year. “The trend is toward specializing your op-
erations and presenting yourself as, say, a Permian basin
story plus one or two other basins.” He said that some firms
want to focus the bulk of their intellectual and financial
capital on a single basin–that is to say, leverage the exper-
tise they’ve gained over years of working in an area—“and
present that story to Wall Street.”
Given its reserves quality and prospectivity for drilling
longer laterals, “everybody seems to say the Permian works
quite well from an economic perspective at $50/bbl [West
Texas Intermediate], maybe even a bit lower than that, when
other basins don’t work so well.” That’s why “the pure-play
Permian guys have had no trouble raising as much capital
as they want and their equity values have just gone up” as of
late. Rowland said, “Right now the flavor of the month is to
invest in these multistratigraphic traps in the Permian and
have 30-36 wells/section, and the concept of net acreage
equivalent is the justification for paying $40-50,000/acre.”
Rice noted that even at oil prices around $50/bbl, companies need additional capital resources. There’s “still some
reticence to look at the equity market,” and borrowing money at the moment “is still a sore spot”
given all of the recent bankruptcies.
Meanwhile, “there’s still a lot of private equity capital out there waiting
and anxious to be deployed,” representing “a ready and able supply side”
for capital.
Operator-investor partnerships
Examples of newly established operator-investor partnerships include last
summer’s formation of a Fort Worth-based, Delaware basin-focused Jetta
Permian LP by Blackstone Energy
Partners LP and an affiliate of Jetta
Operating Co. Inc. With $1 billion
committed in capital, Jetta’s strategy
includes pursuing asset and leasehold acquisition opportunities, farm-in deals, and partnerships or joint
ventures with existing operators and
landowners.
