In oil decline, industry looks for hidden value
Deal-making at expo turns creative as execs wait for oil’s rock bottom
In the buzz of a crowded Houston conference hall on Thursday, energy executives roamed rows of booths lined with brightly colored maps, futuristic décor and one mini pump jack made of Legos.
They were seeking rights for oil hidden in the crags under Texas and the rest of the U.S. on a day when crude prices dropped to a 12-year low. Many would-be sellers have kept crown-jewel assets off the block in hopes of an oil-market recovery.
With a global oversupply of oil punishing the industry, executives at NAPE (formerly known as the North American Prospect Expo) in downtown Houston were forced to get creative, stringing together small, inventive agreements and partnerships to form a patchwork of financially viable oil and gas land.
“They’re not the big sexy deals, but at the end of the day they could be the better deals that people make because they’re not highly valued … and they will have a lot of hidden value,” said Allen Gilmer, co-founder and CEO of Drilling Info, which gathers data on drilling activity in the United States.
Sinking crude prices in the past year have frustrat--
ed both large and small oil producers trying to buy and sell highquality U.S. oil and gas properties, as crude prices have dropped more than 70 percent since the summer of 2014. This year, many analysts predict a reckoning in which financial pressures will force a large portion of the U.S. oil regions to change hands.
“They’re not willing to let go of much yet, but if it’s like this another three or four or five months, you’ll have a lot of opportunities,” said Ricky Cox, vice president of new ventures at Brigham Resources in Austin.
The NAPE Summit, the largest international oil exploration and production expo, has been held in Houston since the early 1990s and draws a mix of small and large oil producers to sell their land, haggle with rival drillers or show off an oil-patch flair with Lego pump jacks and the like.
Today’s oil-production glut is, relatively speaking, a fraction of the oversupply that caused oil markets to collapse in the mid1980s and devastated the Houston economy. Yet it has lasted longer and sent prices far lower than expected.
“It’s extremely painful,” said Greg Wilson, senior vice president at Bounty Minerals in Fort Worth. “Good people are losing their jobs for things they didn’t have anything to do with.”
Executives at the Prospect Expo said they were surprised crude prices haven’t reached a clear bottom yet, or that the market hasn’t even hinted at an end to the brutal oil bust. That kind of market signal would be a firing gun for the oft-predicted rush of oil deals that naturally follows oil downturns, providing financial relief for cash-strapped drillers that have had to cut jobs and drilling budgets to survive.
Spreading the risk
But if no turnaround comes and oil prices remain in the $20 to $40 a barrel range for the next few months, a different kind of deal wave could be coming, as highly indebted oil companies are forced to put their best acreage on the auction block, file for bankruptcy, or both. Beyond ruthless costcutting and attempts to shore up funds from reluctant capital markets, oil companies can’t do much to protect their finances, other than sell assets.
Sixty oil companies have filed for bankruptcy around the world since the downturn began, and 150 more could face bankruptcy by mid-2016 if the downturn doesn’t relent, said Bob Fryklund, chief upstream strategist at research firm IHS. “That’s the path we have to go through before we can start the turnaround,” Fryklund said earlier this week.
For many at the conference, the mood was grim.
“I was early in my career in the 1980s and I didn’t know enough to be scared back then. I know enough to be scared now,” Wilson said.
U.S. crude sank 4.5 percent on Thursday to $26.21 a barrel on the New York Mercantile Exchange, its lowest point since May 1, 2003. The domestic oil price has fallen 76 percent since June 2014. Global benchmark Brent rose 78 cents on Thursday to $30.06 a barrel on the ICE Futures Europe.
“What can (oil companies) say when their income is a fourth of what it was a year ago?” said Michael Kulenguski, an executive at Kew Drilling in Dallas.
Geologists and other experts at the expo said conventional, vertically drilled wells were capturing more attention than more expensive unconventional shale prospects because they’re more financially viable when prices are low. But sellers were also seeking partners in their ventures to spread out their risk.
Julia Battle, a consulting geologist and engineer at Baton Rouge, La.-based Pennington Oil & Gas, said her company is selling interests in its conventional basin properties in Louisiana, which are shallower and cheaper to drill. Such partnerships give companies the flexibility to invest in other wells.
“They’re all large reserves that are going to pay out,” Battle said. “We’re looking for partners to drill those wells. If you have 25 percent exposure to four wells, that’s better than 100 percent of one well. It spreads your odds a little better.”
In 2015, the value of oil asset sales dropped 60 percent to $47 billion, according to deal tracker EnergyNet, and companies have $230 billion in oil and gas assets around the world up for sale, according to IHS. But some smaller transactions have picked up in recent weeks after crude slid under $30 a barrel.
“There’s $100 billion in private equity money waiting until we hit the bottom — they don’t want to buy too early,” William Britain, president and CEO of EnergyNet, said in an interview at the expo.
“But when oil went below $30, people said, ‘I better get a deal done because I don’t know where it’s going to end up,’” Britain said, noting that in the past two weeks, low crude prices seemed to have triggered an increase in the deal flow. “There’s going to be a lot of competition between major oil companies and private equity firms that have a lot of cash.”
It could be months before oil companies are willing to part with their prized oil land, though.
Kirk Lazarine, a managing director at investment firm Grey Rock Energy Partners in Dallas, said nine out of 10 of the properties up for sale in the United States aren’t profitable at current oil prices and very few would survive a prolonged downturn.
Analogy in stone
Attendance at the 2016 NAPE Summit, which runs through Friday, fell nearly a quarter from last year to 11,300 on Wednesday.
John Trueblood, president of Trueblood Resources in Colorado, said he is showing off projects in the Anadarko Basin in the central United States, but he doesn’t expect anyone to buy into the projects yet because companies are still in a holding pattern.
Others at the conference were holding out for a triumphant return to the oil patch, believing that the ongoing downturn could end faster than past spells.
To make this point during the busy conference, Oklahoma oilland developer Ron Mercer gestured toward a bowl full of small flat stones polished jet black, the color of oil.
“That’s 94 million barrels of oil demand,” Mercer said, explaining that each rock represented the 1 million barrels the world consumes every day. He picked up a single stone from his display table, covered in maps of oil-rich land, and dropped it into the bowl. “That is our oversupply. Just that. Once it burns off, it’s going to be a whole different story.”
“I was early in my career in the 1980s and I didn’t know enough to be scared back then. I know enough to be scared now.” Greg Wilson, senior vice president, Bounty Minerals in Fort Worth