North American oil deals trickle back after Brexit shock
(Reuters) Dealmakers have recovered from the shock of Britain's "Brexit" vote last month to leave the EU and have resumed buying oil and gas fields in choice locations in Canada and the US, restocking their inventories on a bet that a two-year slump in the price of oil has abated.
"Buyers are increasingly confident in a stable to slowly increasing oil price - as are their funding sources, whether private equity funds or public market investors," said Bobby Tudor, chief executive of Tudor, Pickering, Holt & Co., an oil and gas investment bank.
Oil prices CLc1 have held steady at or above $45 per barrel for a majority of the last two months and touched a 2016 high above $51, ahead of the British referendum.
Tudor said buyers were banking on it eventually settling at around $60 per barrel, giving them confidence about buying drilling acreage in some of the nation's shale heartlands.
US oil and gas producer Diamondback Energy Inc. last week said it would spend $560 M buying leases on oil-rich land in the Southern Delaware Basin, within the Permian Basin, the top US oilfield, where initial production results have been strong and costs are coming down.
A day later, US energy company Laredo Petroleum Inc. said it would spend $125M buying acreage in the Midland Basin, also part of the Permian.
These deals mark a resumption in buying after Brexit caused a temporary lull in acquisitions.
Before the British referendum on June 23, buyers and sellers had grown comfortable with the idea that oil had rebounded from 12-year lows. That conviction helped to unclog the acquisition pipeline after a long-dormant period in which deals were offered but failed to materialize.
About $5.1 B of US and Canadian properties traded hands in June, the largest dollar amount in more than a year according to PLS Inc., global M&A database for such deals.
Acreage deals create confidence and open the door to acquisitions of entire companies, so long as oil remains relatively steady, according to nearly a dozen dealmakers interviewed by Reuters.
More acreage deals are in the works, including ones that involve large exploration and production (E&P) companies such as Anadarko Petroleum Corp. and Southwestern Energy Co., according to people familiar with the matter.
Restructuring bankers and attorneys anticipate that exploration and production companies that have emerged from bankruptcy, like Magnum Hunter Resources, or are going through the process, like Ultra Petroleum Corp., will be merger and acquisition targets for other oil and gas companies because they are financially healthy, having eliminated much of their debt.
Publicly traded companies are warming up to deals now, a change from when deals were mainly stagnant or acreage was sold to private equity firms in small transactions. Traditional E&P companies dominated acquisition activity in the second quarter, representing 69% and 76% of total transactions and deal value, respectively, Fitch Ratings said in a report on Thursday.
PRICE AND PRIME LOCATIONS
The key dynamic that has developed and allowed buyers and sellers to get back to cutting deals is price.
Greater stability around the price of oil has enabled both sides to negotiate, where previously expectations of further falls kept them apart.
Leading into the spate of deals in June was a nine-week period of relatively low oil volatility, when prices rose about 20% and traded between about $40 and $50 per barrel.
Transactions in June occurred at prices about 10% higher than the far forward crude price for three years out CLc36, according to bankers. That implies that buyers and sellers could agree upon a price of about $60 per barrel, the bankers said.
That forward price has now returned to its pre-Brexit levels of about $54 per barrel, enabling deals once again.
Another key ingredient for completed deals was their location. Many of the sales occurred in areas with the highest margins where pumping at about $50 per barrel is profitable.
The acreage most sought-after is in Texas' Permian Basin and in Oklahoma's STACK area (Sooner Trend Anadarko Basin Canadian and Kingfisher Counties), popular because of their easy-to-extract rock formations and relatively low break-even prices.
In June, Marathon Oil Corp. said it would spend about $888 M to acquire STACK acreage and Devon Energy Corp. said it would sell Texas acreage to Pioneer Natural Resources and an undisclosed buyer for $858 M.
HOPING FOR HIGHER OIL PRICES
While there could be hurdles such as resurgent output and deceleration in demand growth over the next few months, many producers are more bullish on the prices of oil long-term.
"Investors have become overly bearish on oil as concerns over rising US rig activity and high fuel inventories raised doubts about the rebalancing of the market. We think those concerns are unwarranted," ANZ said in a note.
"We think any further decline in prices will accelerate the supply closures again and set the stage for an even stronger price recovery in 2017."
On Friday, US oil prices ended the week 1% higher.
Acreage inventory is being offered for sale, including 180,000 acres of West Virginia holdings currently belonging to Southwestern Energy Co., people familiar with the deal said. Southwestern declined to comment.
Anadarko is marketing 86,000 net acres in East Texas, one person familiar with the deal said, adding that the deal could fetch as much as $1 B.
Reporting by Mike Stone and Devika Krishna Kumar; Editing by Carmel Crimmins and Matthew Lewis
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