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U.S. energy firms chasing oil price rally stumble on old baggage

Reuters  |  NEW YORK 

By David French

NEW YORK (Reuters) - With taking hold, several U.S. companies entered 2018 with a compelling plan - sell undeveloped or less essential fields and invest the to boost returns from their sweetest, most productive spots.

There is a catch, though. The strategy assumes that with crude now up more than 150 percent from its February 2016 bottom enough firms are keen to crank up production, even if it means buying fields with higher extraction costs and lower margins.

So far, sale attempts suggest those buyers may be hard to come by. After a bruising downturn, shareholders are looking to get a cut of improved profits and asset sale proceeds rather than underwrite acquisitions, those involved in these deals say.

"companies are no longer rewarded for simply 'grabbing land' and public investors have become more discerning regarding acquisitions," notes Jon Marinelli, head of U.S. energy and at

Shares of Devon Energy Corp, and and others have rallied after they floated plans to sell non-core acreage, reflecting hopes that some of the proceeds will return to investors.

But since shareholders across the industry in general favor shedding assets over acquisitions, the sentiment makes striking new deals tricky.

An informal poll of five bankers by put the share of sales that failed to close in the fourth quarter of 2017 and the first quarter of this year at between 50 percent and 80 percent, with Marinelli putting the figure at around two-thirds.

Dealmaking for fields going into 2018 was already stagnating. While last year's total sales were only marginally down from 2016 at $67.3 billion, the first quarter accounted for around 38 percent of that figure, according to data provider (Graphic: https://tmsnrt.rs/2Lm2hl3)

If proposed sales fail to materialize this year, it could mean a time of reckoning for these

"If these companies cannot execute the divestiture(s) that gave investors' confidence on their future leverage profile, you would likely see less risk-tolerant investors trim or sell their positions," said Tim Dumois, at Capital Fund Advisors, which invests in

Among those seeking spin-offs, Anglo-Australian Billiton Ltd has the most ambitious plans. Facing the same pressure from shareholders as U.S. energy producers, it wants to sell onshore shale assets in the Permian, Eagle Ford and basins, valuing them at $14 billion on its balance sheet.

While BHP's Permian and Eagle Ford land is generally considered attractive because of low production costs, one of the Eagle Ford asset packages and its fields mainly produce shale gas, making them less appealing to buyers given

would consider a bid that valued the entire business below the company's original valuation, if it ensured no unsold assets remained, according to people familiar with the sale process.

The company received bids from interested parties on May 23, although a final decision on what it will do is not expected for a few months.

WARY

For those weighing acquisitions, Bakken operator offers a cautionary tale. Shares in the company fell as much as 25 percent in the two days after it said on Dec. 11 it paid $946 million for acreage in the Delaware Basin.

Since then, major land purchases by U.S. have fizzled, with executives preaching focus on controlling costs and avoiding unnecessary expansion.

"We can do a whole lot of great work by hitting some singles," Brad Holly, of Whiting Petroleum Corp, told an industry event in April, drawing on a baseball metaphor to describe how the company was looking for some "really small things" to add to its existing acreage.

In the absence of companies as buyers, firms have picked up some slack: the value of land bought by buyout firms rose to 47 percent of the total in the fourth quarter from 11 percent in the first three months of 2017, according to

However, the run-up in oil prices, rather than whet their appetite further has an opposite effect, making firms wary that prices may not be as strong when they are ready to cash out.

Higher crude prices also boost sellers' expectations, making it harder for buyout firms to drive a hard bargain to ensure better future profits. Such calculations gain added significance after years of returns on trailing other sectors.

"If are underperforming the wider S&P, this reduces the chance of private equity buying larger assets because you don't think you'll get a good runway for an exit," said Glenn Jacobson, at

Some sellers have now started moderating their expectations. for example, owned by one of Texas' wealthiest families, split a package of Eagle Ford land it was marketing for up to $700 million in the fourth quarter into three individual pieces, according to a person familiar with the transaction. Two bits went to private equity buyers, with a third sold to for $86 million, the person added.

"The decision becomes do you hold your nose and sell, or do you retain the asset," said BMO's Marinelli.

(Reporting by in New York; Additional reporting by and in Houston; Editing by and Tomasz Janowski)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Thu, June 14 2018. 19:19 IST
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