Insights

Billions of dollars are exchanging hands chasing mineral interest and royalties.

This edition’s Texas Landman field report covers activity in Railroad Districts 1-6. Drilling activity has remained flat with 75 rigs in the Eagle Ford, 37 in the Haynesville, 20 in East Texas and 5 in the Barnett as commodity prices stay soft with oil trading between $45-50/bbl and natural gas below $3.00/mcf. During this time, there has been significant A&D activity in East Texas where companies are targeting the gas-rich Haynesville shale.

In our last update, we reported on CCI’s acquisition of Anadarko’s assets for $1bln which included its Carthage upstream assets of 160,000 net mineral acres and midstream assets. In July, Rockcliff paid $550MM for Samson’s Haynesville acreage comprising 210,000 net mineral acres and then acquired an additional 60,000 net mineral acres from an undisclosed seller. 

When the stakes are high with oil and gas acquisitions—and they always are—you need a rigorous due diligence process performed by an experienced firm to avoid driving up costs or taking too much time. This specialized analytical process, when done correctly, will help uncover potential risks as well as opportunities, while also helping to prevent investment errors or miscalculations.

Smart, money-saving questions

You can’t afford not to ask certain probing questions for vetting purposes when deciding who to hire as your oil and gas due diligence team. You’ll be surprised by what is revealed during this “due diligence” exercise.

Here are the top five:

What landmen should know about this quarter’s E&P transactions in Texas.

The field report for this current issue will cover activity in the Permian Basin, Railroad Districts 8, 8A and 7C, in addition to covering activity in RR Districts 1-6. The Permian is the most active basin with 339 rigs currently running. It is worth noting that in comparison to a year ago, the rig count in the Permian was 141 rigs, less than half what it is today. In a distant second, the Eagle Ford remains active with 75 rigs, followed by Haynesville 37, East Texas 20 and the Barnett 5. This explosion of activity in the Permian was created by massive investments from public and private companies because of the play’s superior economics and low commodity prices. However, Permian acreage comes with a continuous drilling commitment and if left unfulfilled, companies may lose significantly on their investment.

The outlook for Railroad Districts 1-6 remains promising as we look at the decision by OPEX and non-OPEX countries to cut production, combined with the new political climate in the New Year.  Much needed relief has been provided to the gas market this winter with prices nearing $3.50 mcf.  The Texas gas market trends upward as we continue to see increasing quantities of gas shipping to Mexico and to Gulf Coast LNG facilities.  Contributing to this trend, the news of Raven Petroleum’s refinery project in Duval County, Texas with the capacity to process 50,000 barrels/day and store up to 4MM barrels of crude on site. Once complete it will be the first refinery built in the US since early 1970s and it will bring many jobs to South Texas.  In other recent Texas news, TOTAL exercised its preferential right to purchase 75 percent of Chesapeake’s stake in their Barnett holdings where they were originally a 25% non-op joint venture partner prior to this election.  More great news for Texas, Wildhorse Resource Development Corp. successfully raised $400MM in its initial public offering and bought Clayton Williams leasehold in the Giddings field.   Anadarko sold its East Texas assets comprising 160,000 acres and midstream assets to Castleton Commodities for $1 bln.   We have also seen a significant decrease in the number of companies filing Chapter 11 in the last several months.  Many of the companies that previously filed for bankruptcy protection have now reemerged and are shedding their noncore assets while other companies selling assets in RR Districts 1-6 are raising money to invest in their core areas.

The current activity in Railroad Districts 1-6 should be described by the number of companies filing for bankruptcy protection rather than the normal metric of the number of rigs running.   To bring this illustration into further focus, I believe that more companies will file for bankruptcy protection in Texas this year than there will be rigs currently active in the Eagle Ford.  The number of these Chapter 11 companies will be overwhelming and for the companies that were fortunate enough to not file for bankruptcy, they will be a mere shadow of their former self.  Take Chesapeake, the largest and most active producer in the Barnett shale since its inception just announced the sale of their Barnett shale properties to private equity backed Saddle Barnett Resources.  Chesapeake’s market capitalization in just 2 years has fallen from $20.4Bln to $4.7Bln.  The fallout from these bankrupt and zombie companies continues to have a devastating impact on landmen, our families and our industry.  You need only to read the posts on AAPL LandNews in order to gain huge insight on how landmen are faring after 2 years of falling oil prices.  The impact is intense and far-reaching with AAPL and NAPE both experiencing dramatic declines in event attendance and making necessary cuts in order to maintain a balanced budget.

Since writing my last report, the price of oil has increased by 37%.  The pundits say that we have reached the bottom and that the price of oil will stabilize somewhere above $50/bbl.  Regardless of the price today, damage has already been done to majority of E&P companies and the impact is staggering. Industry experts forecast that as many as 150 E&P companies will file for bankruptcy protection in 2016.  As of the time of this writing, I count 10 companies that have filed since January 1, 2016.  If the expert’s forecasts are correct, we may be counting 140 more this year.  In other somber news, this past March lost a landman and visionary in our industry, Aubrey McClendon, who died in a car crash in Oklahoma City. Whether or not you are in agreement with his beliefs or business approach, industry consensus would say that Aubrey was ‘one-of-a-kind’ and no matter where any of us has been in the industry, we have all been touched at some point by Aubrey or one of his companies – that is one heck of a footprint to leave.

As oil prices remain stagnant, many companies are seeking to offload non-core assets in an effort to survive the downturn. As a potential buyer, there are increasing opportunities to acquire portfolio assets at a discount. In this pricing environment, there are additional considerations any would-be buyer should plan for as part of its acquisition model.

UNDERSTANDING LIEN PRIORITY
Buying from a Distressed Seller

When reviewing buying opportunities, be sure to evaluate the financial health of the seller as part of your pre-due diligence. Identify whether the potential seller may file for bankruptcy within the next two years. If you are concerned that a bankruptcy filing may be in the seller’s future, you should ensure the transaction is at arms length and would be considered fair and reasonable to an outsider who may have an interest in seller’s assets (such as a creditor). Work with legal counsel to mitigate your risk during the negotiation period. Carefully value your assets, and understand the Seller’s financial health before proceeding with a buyer’s due diligence of the assets.

Drilling activity in RR Districts 1-6 continues to slow as oil settles to below $30/bbl. today.  Companies are drilling required wells only and deferring completions until prices rise, which adds to the already growing number of DUC wells.  E&P companies have gone into a heighten state of capital conservation which means that the only money they are spending is on essentials to keep their enterprises alive, like debt service, payroll, and royalties to name a few.  The M&A activity in the Texas area this quarter has been marginal and there are only a few companies with property packages on the market in the Eagle Ford, Eaglebine and Haynesville regions.  These companies include Real O&G, Clayton Williams, AWE Ltd., and VirTex Operating.   At this time most buyers are staying on the sideline until they find out ‘where the bottom is’ for the price of oil, but this sideline activity may change significantly in the months to come as companies will face a redetermination of their borrowing base. Any company that is out of compliance with their loan covenants will be forced to either sell their properties, merge, or seek bankruptcy protection.  The good news is that this activity will generate work for landmen as the properties change hands.