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Q&A: Private equity investors buy the dip: Bracewell

12 Jun 2017 17:31 (+01:00 GMT)
Q&A: Private equity investors buy the dip: Bracewell

Houston, 12 June (Argus) — The recent dip in oil prices may give private equity investors a window to acquire assets as publicly listed companies take a pause after a flurry of activity earlier this year. Austin Lee, an energy attorney with law firm Bracewell, spoke with Argus Media on the landscape for US oil and gas mergers and acquisitions, asset valuations and changes in the way deals are getting done.

What is your outlook for US oil and gas M&As?

Right now we are in a bit of a change. About six or seven months ago, you had the peak of activity going on in the Permian especially. Now, as you are experiencing a trough in prices, it is definitely taking a pause, which may make for an opportunity as well.

The public equity market is watching the price dip and the impact on the ability of public buyers, or potential buyers that get into equity markets and finance deals. That has been the mantra of the day: Private companies, PE-backed (private equity-backed) companies, selling to public buyers. Now as those are on pause it could create an opportunity for the PE side to come back in and buy some assets.

What about asset valuations?

I think they have contracted a little bit. Some of the expectations have been tempered a bit on the sell side — that's just what people are seeing in their bids. I think it is going to be a story of [oil] price. Pricing is going to tell the story because it is going to impact the public equity market and if there is a prolonged downturn in the price, you might be back in the situation like about 15 months ago where there was a pause.

Overall from a deal lawyers' perspective, the M&A industry has definitely taken a little bit of a pause, but there is still stuff going on. There are still deals happening beyond the Permian, which we didn't see at all happening in 2016. It is still a positive picture in my mind right now. We are looking off in the future and it is a little foggy.

With lower oil prices, are we likely to see more gas asset deals?

I think you could. I think again it is a pricing story that will be driving that. Speaking from the deals that we hear about and see, I think there has been a little more of an interest in the very recent couple of weeks in some of these other basins. And they do have gas.

It is all economics. If you look at the Bakken economics, there have been a couple of deals lately because differentials are at $4/bl versus three or four years ago when they were $14/bl.

You have seen some Marcellus deals, sub-$500mn, but they are good deals. I think it is a flurry of activity out there that we haven't seen in a while. All of the stuff that traded are all gassy — people are seeing some firmness in the gas price.

Will we see large Permian deals similar to ExxonMobil's $6.6bn purchase in January?

I can't think off the top of my head of somebody who is looking to trade with a position that is that large. You will probably see some above $1bn or close to $1bn deals that are either in the process of being marketed right now or will come in to the market. There are large deals to be had, less of them now, after last year where a bunch of them got scooped up by public companies.

It gets tough for private equity to really take a huge bite from another private equity company in the way of a $1bn deal at this point. To me, opportunity for private equity is going to be in the sub-$500mn deals.

Has the Trump administration made a difference in sentiment?

I think overall the industry is encouraged by the Trump administration. It is not the foundation of why a deal gets done, but you do see that the regulatory scheme nationally looks pretty good.

But on a localized level, you are seeing that the political climate may not mirror the national political climate. People are looking locally to see if state rules and regulations are going to creep up and impact their ability to produce in certain areas.

We have seen that happen as a stumbling block. It is not material, it is not a big deal that is killing a bunch of deals but it is just that we have seen and said 'Ah, that's interesting.'

Any other changes in deal-making, or the way deals are getting done?

There is this thought: I am marketing my acreage position but we have this well-oiled machine that continues to aggregate acreage and we don't want to stop that and we want to get paid for that.

So it is like this — I am a seller and I have put together 10,000 acres as of today, but my business development guys are out buying acreage every day. So I want you to be able to take down additional acreage that I am buying, between the day that you make your bid and the day we sign an agreement and even before we close. So from the legal side, there is some gymnastics to be played on how you incorporate those additional properties.

Two or three years ago this was something that was more unique, but in the Permian, and in other places, it has become something that you are seeing in almost every deal these days. A seller does not want to take a pause to go through a sales process and lose out on their foothold in the area they know the best.

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