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Oil and gas companies in ‘show me the money’ mode at Mergermarket Energy Forum

Hana Askren reports from the sidelines of the annual conference in Houston.

Ten years into the shale revolution, investors are weary of growth without cash flow, while companies are reluctant to engage in much-needed consolidation, said panel participants at the Mergermarket Energy Forum in Houston this week.

Corporate M&A could improve well productivity and company profitability, said Credit Suisse Managing Director Randy Bayless. Permian public companies spend $1bn annually on general and administrative (G&A) expenses and "need to merge for synergies," agreed Scott Gieselman, partner at NGP Energy Capital Management.

But consolidation will be difficult among management teams who don't "want to hand over the keys," said Bayless. The $80,000 per-acre valuation enjoyed by RSP Permian in its acquisition by Concho Resources earlier this year is unlikely to be repeated, he added.

Corporate deals with the same high level of G&A and land synergies, trading multiple differential and industrial logic are few and far between, said Shaia Hosseinzadeh, managing director at OnyxPoint Global Management. At the same time, other combinations do make sense, he added.

"There should be more mergers of equals," echoed managing director at Kimmeridge Energy Noam Lockshin, whose company is calling for Carrizo Oil and Gas to do a transaction because it is "sub-scale." Companies of sufficient scale will have better access to capital and provide liquidity for investors, he explained. Even an at-par merger would make sense for many post-bankruptcy companies with former creditors, now shareholders, who would benefit from such a deal. These "unnatural holders" need sub-scale companies to achieve scale so that they can exit as new investors come in, agreed Bayless.

In the doghouse

But as much as companies need investor support to do deals, "the public markets are losing confidence" in the sector, said Noam. Oil and gas is in neither a boom or a bust, and public and private companies alike need to "show that they can make money," said James Obulaney, director at Denham Capital.

The situation does not bode well for private equity firms. With public currencies trading down and companies under pressure to make their existing assets perform, PE may have a hard time selling portfolio companies, they said. More than 40 public companies are trading below PE comps, Lockshin added. Obulaney noted that Denham is prepared to hold its investments longer if the buyers "just aren't there."

In this environment, oil and gas producers are finding capital via structured equity vehicles such as drillcos and convertible preferred offerings, said Vincent Hahn, managing director at The Carlyle Group. Secondary funds are forming to buy out PE holdings, added Hosseinzadeh.

OnyxPoint recapitalized Permian Resources last May, along with private equity owner Energy Minerals Group, in a deal that converted some debt to equity and injected new equity into the company.

It remains to be seen whether market pressures will force a new business model on E&Ps, but all participants agreed that consolidation would be good for the industry. Ultimately "the market will identify consolidators - and give them the currency," said Gieselman.

Hana Askren Senior Reporter Mergermarket (moderator)

Hana Askren is a Senior Reporter in New York for Mergermarket’s energy team. Hana joined the company in 2007 as the markets began to crash, and has covered the energy and infrastructure industry through the credit crisis and through the ups and downs in oil and gas prices. Prior to joining Mergermarket, Hana completed an MA in Arabic Literature at McGill University and trained as an Olympic hopeful in freestyle wrestling.

Hana Askren Senior Reporter Mergermarket (moderator)

Hana Askren is a Senior Reporter in New York for Mergermarket’s energy team. Hana joined the company in 2007 as the markets began to crash, and has covered the energy and infrastructure industry through the credit crisis and through the ups and downs in oil and gas prices. Prior to joining Mergermarket, Hana completed an MA in Arabic Literature at McGill University and trained as an Olympic hopeful in freestyle wrestling.

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