The Energy Question Episode 56 Andrew Dittmar, Director at Enverus
The Energy Question Episode 56 Andrew Dittmar, Director at Enverus
David Blackmon [00:00:13] Hey, Welcome to the Energy Question with David Blackmon. I’m your Host, David Blackman, and my special guest today is returning guest Andrew Dittmar, Director at Enverus, one of my favorite companies and one of our former sponsors here at the Energy Question. Andrew, How are you doing today?
Andrew Dittmar [00:00:29] Hey, Doing Great! Glad to be here talking with you.
David Blackmon [00:00:32] Andrew is one of the best analysts working today on M&A activity, Mergers, and Acquisitions in the Oil and Gas Business. And I assume you probably work to do a similar analysis for other businesses as well.
David Blackmon [00:00:48] We’re going to talk about upstream M&A activity in the Second Quarter. But before we get into it, Andrew, just remind our viewers what your role is and Enverus and Talk about your background a little bit.
Andrew Dittmar [00:01:03] Absolutely. So I’m part of the Enverus Intelligence Research Groups so we are the Research focused arm of and Enverus. We cover all of the major shales plays with an asset team that does the deep-dive geological work.
Andrew Dittmar [00:01:15] We have a Commercial Team that I’m part of the track EMP Equities and my particular focus is M&A activity. And we also have an Energy Transition Group now that’s focused on some of the new energy stuff that’s out there.
Andrew Dittmar [00:01:26] So as you mentioned, I cover M&A for pretty much all energy after just saying I’m an oil and gas analyst and energy analyst these days, but still probably spend the bulk of my time on the upstream side and one of my favorite things to talk about so happy to be here chatting with you about that.
David Blackmon [00:01:45] Yeah, man. I tell you, we had a big resurgence just as you last time you were here was in May. You told us then after a pretty dormant first quarter this year, when when we had, what, like $8 billion, I think it was in upstream M&A in the U.S.
David Blackmon [00:02:02] You told us that you expected it would increase pretty significantly as the year went on. Second quarter, big increase, just like you said. Talk about what happened in the Second Quarter here in the upstream sector.
Andrew Dittmar [00:02:17] Sure. So I did expect it to get back on track after kind of a quiet Q1. We were up three times Q1 activity, 24 billion over 8 billion, and about double what M&A activity was on the upstream side in Q2 22 so the big jump year over year as well.
Andrew Dittmar [00:02:37] It’s really back to that core theme we’ve talked about a few times, which are these public companies that need inventory, particularly some of the smaller-sized ones looking at where they can find it. And we’re the best inventory you can buy right now is is on the private side in the Permian Basin.
Andrew Dittmar [00:02:51] So you have these companies that were sponsored by INCAP or MGP, a lot of these were put together in 2016 through 2018. So sort of the life cycle for a private equity investment tends to be give or take five years, six years.
Andrew Dittmar [00:03:06] They’re coming up at a point where they were looking to sell they had some of the public companies really wanted to buy in the form of Permian inventory. So motivated seller motivated buyer, it’s good to have those two things at the table if you’re trying to do a deal.
David Blackmon [00:03:19] Yeah, it is. And, you know, in the First Quarter, you know, well, what was it, 6 billion or the $8 billion were focused on the Eagle Ford shale, which was kind of surprising in the first quarter because the Permian practically had no activity.
David Blackmon [00:03:35] So now the Permian has come roaring back and is really the focus of what happened in the Second Quarter. What are the factors beyond that? Is it just the attractiveness of the assets or is there more at play there?
Andrew Dittmar [00:03:46] No, I mean, I think just attracting the assets is always for Oil and Gas that’s the end of the day, what it’s all about for us quality rock are you drilling.
Andrew Dittmar [00:03:56] The Eagle Ford being the focus was interesting for Q1, I think it was the focus one because there wasn’t much Permian activity. So it wasn’t the Eagle Ford so large, it was a larger chunk of a smaller pie. And then we do still like the Eagle Ford there are some interesting opportunities there we can talk about here in a little bit.
Andrew Dittmar [00:04:11] But on the Permian side, if you want to look at Tier one inventory and we kind of classify things that break even at less than $50 WTI as being Tier one. So if you want to have that quality of inventory, there’s really just not a lot of places you can buy it outside the Permian where there isn’t a whole lot of it outside the Permian.
Andrew Dittmar [00:04:29] And then what there is of that quality threshold and say the Eagle Ford tends to be pretty closely held by a marathon or an EOG or a Devon, and they’re not going to sell that stuff.
Andrew Dittmar [00:04:37] So if you want to really get that quality, which companies do because that’s what lets you keep capital expenses low while still meeting your production targets, having capital efficiency and being able to fund those generous dividends and share buybacks that investors have gotten used to, You need that high-quality inventory to be able to do that.
Andrew Dittmar [00:04:58] A lot of the large public companies have a decade or more, so they’re in good shape somebody from Diamondback or Pioneer, but the smaller companies maybe have less than five years of that on their books. So it’s a concern to the management team it’s something the investors are watching.
Andrew Dittmar [00:05:13] Their stocks tend to trade it a little bit lower of a valuation and some of the big public because they don’t have that duration on their cash flows from long live at high-quality inventory. So that was really the key knock, I think, on some of these stocks and naturally, that’s something they want to address as a focused on a buy-in that kind of quality threshold in the Permian.
David Blackmon [00:05:32] So we do still have, you know, these acquisitions where, as you say, they’re smaller companies, you know, still multibillion-dollar acquisitions, but they’re not the big independents, like a Diamondback or like a Pioneer Natural Resources.
David Blackmon [00:05:48] In the past couple of years, we’ve seen Buyouts of Anadarko Noble, you know, and some others that really were the big independent producers. Are these independents that are still out there like like the Pioneer and Diamondback specifically those companies planning to stay in the business?
David Blackmon [00:06:09] You know, and just so people understand, I spent my career working for companies like Burlington Resources and El Paso EMP and Lin Energy, you know, who were companies that were being built to become attractive for being sold right to bigger companies.
David Blackmon [00:06:27] And so I just wonder, is that kind of business model with these large independents? has that played itself out or do we should we still think of them as potential takeover targets in the future?
Andrew Dittmar [00:06:42] Yeah, that’s a fantastic question. I don’t know if there’s much on the public side that’s being built for sale. That’s definitely the model on the private side.
David Blackmon [00:06:49] Yeah,.
Andrew Dittmar [00:06:50] I think most of these publics at least are messaging that they’re going to be around for a long time, but we’re nearing an inflection point in the market. So and we had the big Quarter this Quarter, so Q1 might have been a little quiet. We had a big quarter before that on as private equity sales. I think there’s been a little over 60 billion in sales since the start of 21.
Andrew Dittmar [00:07:10] So in terms of large strategic in, again, maybe they’re small compared to some of the big public companies that’s large for private company type deals we’re talking about, there’s just not much of it left.
Andrew Dittmar [00:07:20] We ran the numbers, I think, in the report that there are more than 10,000 net drilling locations left in the Permian in the hands of private companies. But most of that’s being held by your ETAs or newborns, your Dever these are family companies out in Midland. I’d never say never on a sale, but when you sit down in their offices, they talk more about managing for the next generation than they do owning the company.
David Blackmon [00:07:40] Exactly, Yeah.
Andrew Dittmar [00:07:41] It was anyone I expected to be around a long time. It’s going to be these guys. Yeah, I don’t think they’re going to be available for sale anytime soon.
Andrew Dittmar [00:07:48] So if you look, they’re kind of built for, say, large private equity companies. There’s a handful out there, but there’s just not much left at these public companies these smaller ones are still going to be short inventory when this cycle of deals is done sort of what’s next?
Andrew Dittmar [00:08:03] I think corporate M&A is probably the logical thing to see and that can go up and down sort of the value chain or the food chain for these companies. Then I think you could see some of the ones like Diamondback or Pioneer play a role as an acquirer for some of these smaller companies. Some of them have some pretty high-quality inventory companies the high-quality inventory would be like your matadors and your Permian resources that are a little more Delaware-focused.
Andrew Dittmar [00:08:28] Some have inventory that is still very high quality, maybe not quite that high quality, but equivalent to these private assets that have been getting high dollar per location numbers but traded pretty attractive multiples relative to private deals or pricing so that could be something they look at.
Andrew Dittmar [00:08:44] And these bigger companies, even if they don’t tend to sell if the right offer comes along from an Exxon or a Chevron, it could present the best value for their shareholders. So, you know, I think we’ve seen some movement for both Exxon and Chevron on the corporate side, not being a pioneer-sized company, obviously with the Chevron by PDC and Exxon…
David Blackmon [00:09:03] Pretty Big that was a big buy from Chevron. What was that, 7.6 billion?
Andrew Dittmar [00:09:08] That’s right. Yeah.
David Blackmon [00:09:09] Yeah. I mean, and so that one was interesting to me too, because, you know, we talk about the Permian and the $50 threshold for Tier one assets. Well, PDC is a big D.J. Basin Producer. And I you know, I understand Chevron had a big preexisting position and has always been one of the big players up there in the DJ Basin. But are those really Tier One drilling opportunities up there in Colorado?
Andrew Dittmar [00:09:36] Yeah, you know, the rock in the DJ, it looks fantastic. Definitely sub-50 even into the low forties in some cases. We think Chevron was able to get a pretty good deal on PDC you’re paying well less than a million per location, whereas inventory of that quality in the Permian would cost you significantly more than a million.
Andrew Dittmar [00:09:55] So from a Geological Rock Perspective in Colorado is great. The issue, as you know, and I’m sure a lot of your listeners will come across Regulations and Politically it’s maybe a little bit dicey here to be operating in Colorado versus rural West Texas.
Andrew Dittmar [00:10:11] So there is some discount on DJ Basin assets that we’ve seen in the market where they trade cheaper than they should just based on the underlying quality.
David Blackmon [00:10:19] Well, let me ask you, this is great I don’t mean.
Andrew Dittmar [00:10:23] Please do.
David Blackmon [00:10:24] But but you just made that point, I think it’s a great one to make about the regulatory risk. Right? And so so, yes, I. I mean, to this point, it’s been better to be drilling out there in rural West Texas. But now we’ve got the doomed Sagebrush Lizard going to be listed as an endangered species in the Permian Basin.
David Blackmon [00:10:42] We have the EPA making noise about holding the Permian Basin in a non-attainment position with the Ozone Regulations. Could we see the Permian assets suddenly start being discounted due to federal regulatory risk that hasn’t been the case in the past? If the Biden administration keeps moving in that direction.
Andrew Dittmar [00:11:08] Yeah, these are definitely conversations that our clients are interested in and were having. And what are some of these new regulations going to mean for asset values going forward, particularly some of the methane monitoring changes that are driving?
David Blackmon [00:11:22] Right the Methane? Yeah, yeah, yeah.
Andrew Dittmar [00:11:23] Coming down the pipe. So I think it’s definitely an awareness in M&A. We’re actually doing some research on how how to assets positioning in terms of emissions intensity and methane and some of that compare with valuations to see if these fire emissions assets might be discounted because they’re concerned about regulatory changes that are going to hit the values.
Andrew Dittmar [00:11:45] Right now, we don’t see where that’s been the case but as these changes get closer, we do expect that buyers are going to be asking about that in a data room or in the process as they go through and in fact met into their valuation numbers, although compared to the size of the deals, the cost to meet these regulatory requirements really aren’t going to be that bad.
Andrew Dittmar [00:12:06] And if you’re talking about a billion, $1.5 billion Permian Acquisition, maybe under the worst case and the Federal Regulations, you’re looking at like 50 or $100 million fix to get your wells up to speed or to meet those requirements.
David Blackmon [00:12:23] For the methane you’re talking about the Methane
Andrew Dittmar [00:12:25] Yeah, this is just I’m just kind of making the idea scale, but well, $1,500 million sounds like an awfully big chunk to me. Yeah, well, if you’re talking about capital expenditures in oil and gas, I don’t know that you’re going to walk away from a big Permian deal because I know you may discount your deal value by a little bit, but it’s not going to change the whole structure.
Andrew Dittmar [00:12:46] So there’s nowhere that has Zero Regulatory Risk but you still see the Permian of the Eagle Ford. You know, Bakken is relatively lower risk than the DJ.
Andrew Dittmar [00:12:57] I think within Colorado it’s important to note that the regulatory framework they have in place, caused a stir when I was first put there, but companies are then pretty well able to operate around it. They’ve done a job of permitting wells years out I think like PDC was bought by Chevron, they had permits through 2027, I want to say.
Andrew Dittmar [00:13:14] And so that the current framework I think hasn’t been as bad as what maybe the concerns were when it was put in place but that doesn’t mean that it can’t change. The framework is only as good as the legislative session they may bring something else. So it’s been manageable so far, but definitely, something companies have their eye on.
Andrew Dittmar [00:13:33] Be on just the Regulatory side DJ is a really consolidated basin. I mean, there were four big players before that, PDC, the other Chevron, Oxy, all kind of the big multi-based inside, and then Civitas and PDC on the independent side.
Andrew Dittmar [00:13:46] Not a lot of privates left there that you really could build a position of scale. So I don’t think you’re going to really get new entrants anyway. Even if you take the Regulatory piece off the table, it’s just not attractive to buy into a play that’s already basically been consolidated.
Andrew Dittmar [00:13:58] So your buyer universe was essentially those companies and it got interesting to watch the routes both PDC and Civitas realized that I think they needed to do something and they went completely opposite directions.
Andrew Dittmar [00:14:09] PDC says were out there nice from Chevron, give our shareholders some equity there and let it run, Civitas said well, we’re going to go try to look in the new basin bought the and in Delaware.
Andrew Dittmar [00:14:20] So I think it’ll be interesting to you know look back a year or two from now and see how those two strategies played out and which set of shareholders have gotten the better value.
David Blackmon [00:14:30] Yeah, Civitas has always been an interesting company to me. I interviewed their CEO a few years ago for a magazine story and he was talking then about his vision of the US shale business.
David Blackmon [00:14:43] He’s a very ESG-focused individual from Private Equity Firm, and he’s talking about his vision for U.S. shale, being that ultimately you consolidate it all down to where you only have about a dozen big operators managing all of those shale assets as sort of a manufacturing operation so that you’re taking maximum advantage.
David Blackmon [00:15:09] Two things, you’re taking maximum advantage of economies of scale with all the connectivity of all these assets. And then also you’re maximizing the ESG focus on those assets so that it you know, it just makes it easier to cut emissions and implement the right government’s policies and all that. Civitas just, you know, moves into the Permian Basin now, talk about the two acquisitions they did.
Andrew Dittmar [00:15:37] Yeah. So pretty much down and down the fairway and we’re talking about M&A activity to private equity companies that they rolled up both from MGP Tap Rock over in the Delaware Basin, Hibernia in the southern Midland, both good companies, good assets.
Andrew Dittmar [00:15:55] We like the Tap Rock deal a little bit better, both kind of in terms of where the valuation landed and the underlying quality of the asset. We think that the best of the Tap Rock Assets going to be the very best that Civitas has going forward.
Andrew Dittmar [00:16:07] So while the DJ accidentally has very good rock as that Tier one Delaware stuff is just another league in terms of the quality, Hibernia in the Southern Midland was maybe a little bit more expensive than we’ve seen some deals with kind of that asset quality price taking a step towards the margin of the base there on the southern side.
Andrew Dittmar [00:16:26] And the Delaware relocation to us looked a little bit high relative to the number of locations that we were willing to underwrite on it. There may be some additional potential there.
Andrew Dittmar [00:16:36] I think one of the stores we’re seeing in the Permian Basin is that there are the locations you think are there based on existing wells and proven results. And then there are the locations that no one’s tried that bench in that area yet, but geologically, it looks like it has a lot of potential and there’s a big uplift in Permian inventory if you start thinking about what is geologically there versus what’s been proven so far, there’s still a lot of potential running room.
Andrew Dittmar [00:16:59] So I think some of these buyers are moving towards the margins of the Basin. They’re looking at assets where you have two or three proven benches, but there could be another two or three that geologically work.
Andrew Dittmar [00:17:10] So example Hibernia is the Wolfcamp we think works in that area, spread very has potential but hasn’t been fully delineated yet. So same kind of do the same thing on a smaller scale.
Andrew Dittmar [00:17:20] They went a little further north in the middle of what we’ve seen most companies go up the Dawson County to look at the Deane and I think middle Sprayberry Geological has some potential just hasn’t had the wells put on line there yet. So the best thing to watch and go ahead.
David Blackmon [00:17:35] Yeah I mean so technology really plays a role in this, right? As technology improves, fracking techniques improve. You can turn tier two drilling locations into Tier one recoveries, right? I mean, and so I think it makes sense for some of these companies to be looking, you know, trying to push the limits of where the delineation limits of these play areas, Right?
Andrew Dittmar [00:18:01] Yeah, absolutely. The technological innovations probably get tougher as the years go by because they’ve gotten better and better at this. The big learning gains you had in the early days of shale maybe aren’t on the table, but the companies are still experimenting.
Andrew Dittmar [00:18:15] I mean, EOG has been changing well designs in Delaware that no one is quite sure what they’re up to yet they played it very close to their chest, but it’s a very EOG-type story being both innovative and quiet. But they’re still working on their well design there so Technology, you know, just how much inventory you have.
Andrew Dittmar [00:18:34] And the price is a big concern as an inventory to said about there’s so much inventory at $70 oil or $80 oil. But if you burn through that inventory and there’s really not another slug of global production to come online, global oil prices go up, the inventory you’re going to have that makes economic sense to drill that $100 oil, $120 oil is going to be entirely different than what you have it, 60 or 70 so prices can have a big influence there.
Andrew Dittmar [00:18:59] And then we talked some about geological expansion and whether are there any other resource plays to be found, which I think we probably know where the shale plays are at this point. I don’t know that there’s any other one to uncover. I don’t know that we’re going to go back and revisit, say, the Tuscaloosa Marine or one of those plays that didn’t work.
Andrew Dittmar [00:19:15] But for the Permian, it’s just such an amazing area I mean, it’s always got more to give. So in terms of future growth and potential resource expansion, you know, we still like the Permian and finding benches and pushing the margins further out. We think that there’s still quite a bit of potential running room left still to uncover in both the Delaware and Midland.
David Blackmon [00:19:35] Yeah, I remember the early days of the Permian Development well, early days ten years ago, there were entire conferences being arranged in the Midland Odessa area, just to talk about the Cline Shale and how the Cline Shale was going to be the next big gas play out there in the Permian that one, of course, you know, they produced pretty mediocre results.
David Blackmon [00:19:57] But this is what differentiates the Permian from these other shale play areas, and that is the existence of half a dozen big shale formations that companies are able to explore as time goes along so that’s a big factor in why these Permian assets are so sought after, right?
Andrew Dittmar [00:20:19] Yeah, absolutely. You know, ultimately, there’s probably not going to be a lot of surviving shale companies that don’t have at least some exposure to the Permian as we talk about this consolidation and I would agree with the Civitas CEO for what it’s.
David Blackmon [00:20:33] Oh I meant to ask you about that but yeah.
Andrew Dittmar [00:20:37] There’s still too many public companies out there I think that’s been a consensus in shale since the get-go, almost. And the more consolidated industry makes sense from a strategic perspective it makes sense for investors you have lower DNA we’re better able to tackle the regulatory and environmental concerns, like you mentioned. So I think we do need to see more more consolidation in the industry.
Andrew Dittmar [00:20:57] Those deals are just hard to put together, whereas these private companies are kind of built for sale as we talked about. There are not a lot of public companies that really follow that model.
Andrew Dittmar [00:21:05] So you’re gonna have to convince a board and management team that really believe in their assets and their story that, hey, you’re gonna be better off handing this over to somebody else. And that presents a better value for shareholders. So just getting the right alignment in terms of everything on these public deals can be challenging.
Andrew Dittmar [00:21:21] But I think we really should, should see more certainly just this consolidation of the smaller players and even some of these bigger ones as we talked about, you know, the big Permian names or even multiples in the Devon, a marathon could be interesting for one of the majors to go after.
Andrew Dittmar [00:21:35] So which kind of at the end of the day takes us maybe back more to what oil and gas look like before Shale where you had a handful of big companies majors that really control the premium resource and then you had some smaller private or public companies that kind of were scrappy and got by on old legacy assets.
Andrew Dittmar [00:21:53] But most of the tier one stuff is going to it’s going to find its way into the hands of the big companies and nearly all of those are going to have, you know, Permian exposure combined with some Eagle Ford or Buccaneer Gas we haven’t talked about at all yet, which is a whole other story.
David Blackmon [00:22:07] No, I know, I know. Yeah. I mean, and of course, Natural Gas is a big factor in the Permian Basin really that no one ever talks about. But the Permian is the second biggest gas-producing basin in the country.
Andrew Dittmar [00:22:19] Much of the frustration of, I think, pure gas producers in the Haynesville in other areas that.
David Blackmon [00:22:25] Right.
Andrew Dittmar [00:22:25] It’s hard to make money on a commodity. Someone else is willing to give it away practically for free because they’re making all their money on oil.
David Blackmon [00:22:32] Well, what do you see? I mean, does this the gas, the potential gas recoverability in these Permian deals, I mean, obviously they have the the acquiring companies have to analyze what that is.
David Blackmon [00:22:46] Does it play a big, big role, though, in determining whether or not the company is going to ultimately move forward with an attempt to buy out another company in these deals?
Andrew Dittmar [00:22:57] Yeah, no, it’s going to play a role for sure. I mean, you’re going to fully value what you think the production is worth. Oil, Gas, and Ingles You’ll have your strategy for getting that gas to market, which you are going to have probably oversold at this point.
Andrew Dittmar [00:23:10] But larger companies, more opportunities to get that gas to market, maybe more pipeline access just easier to piece that together than have been coming at it from a small scale.
Andrew Dittmar [00:23:18] So a pipeline Access says is important for both factors, important for your economics that you do want to get something for that gas, you want to sell it, and then important for your emissions metrics as well that you want to be flaring that at high up on the flaring intensity.
Andrew Dittmar [00:23:30] So that’s definitely being factored in in the Permian. So it’s just going to be what is the war going to produce overall, all what we expect oil and gas prices to be, and what economically makes sense on these assets.
David Blackmon [00:23:42] Was interesting. You know, earlier this year we had a lot of talk there’s a lot of chatter out there about the Permian being somewhat constrained from takeaway capacity, particularly related to Natural Gas and I guess liquids, too. But I haven’t I haven’t seen much chatter about that recently. Is it not no longer a significant concern out there?
Andrew Dittmar [00:24:04] Yeah, I haven’t either. Obviously, you’re always watching. Production versus takeaway capacity and making sure you’re not going to have a differential blowout on your gas but it doesn’t seem like that story has been as hit on as it was previously. Probably a combination there is some additional pipeline capacity going online.
Andrew Dittmar [00:24:24] And then another aspect of this public consolidation of the privates is it usually leads to a drop in rigs. I think every private sale that I’ve seen is involved cutting rigs 50% is kind of probably a ballpark number.
Andrew Dittmar [00:24:37] So as you consolidate some of those privates that were high growth, you know, maybe you’ve taken some of that kind of ramp off the table and you’re a little less concerned about running out of pipe.
David Blackmon [00:24:46] Yeah, I don’t obsess over the rig counts anymore, but I do read the inverse report every week that I get over from you guys. And we had a pretty significant reduction just last week.
Andrew Dittmar [00:24:58] Right.
David Blackmon [00:24:58] I wondered if, if any of these that any of these deals, you know, this increased M&A activity has an impact on the fact that the rig count, which had actually risen for a couple of weeks in early July as the second half budget began to kick in, suddenly, you know, now it’s going back in the opposite direction. We’re down 20% for the year, is Enverus anticipating continued rig count declines for the rest of the year? You know, to be honest with necessarily.
Andrew Dittmar [00:25:31] An addict, I could tell you exactly. But yet broadly aware of where it’s at. But yeah, but not week to week following that closely.
David Blackmon [00:25:40] Well, one other thing I want to ask you about, and I know it’s not upstream, but the other really significant acquisition you mentioned earlier was the Exxon Mobil acquisition of Denbury. And, you know, do you analyze that kind of transaction in the work you do, I just wonder what your thoughts are about that.
Andrew Dittmar [00:26:01] Yeah, absolutely. Falls well within our wheelhouse, both on the legacy side and very still has production and as an upstream producer.
David Blackmon [00:26:09] Yeah.
Andrew Dittmar [00:26:09] But the real bulk of the value here we think is in that key US business in the pipeline asset that they have our assets. So something we ran the numbers on, not a surprising deal at all. You know Denbury obviously went through a reorganization a bit back post that it was a tragic alternatives process to put themselves up for sale and Exxon was really the natural buyer there given their focus not only on carbon capture but specifically Gulf Coast Carbon Capture which is where the main pipe for Denbury runs.
Andrew Dittmar [00:26:41] So it’s sort of expected that Exxon would look to make a deal there. Denbury traded at a pretty good premium around seven times EBITDA versus these pure oil and gas producers of a similar scale trading it more like 3 to 4 times. So that key U.S. business was definitely receiving a higher multiple and probably some premium baked in because it was so well-telegraphed that they were looking to sell and Exxon was the likely buyer.
Andrew Dittmar [00:27:08] So when the deal actually announced it was a 2% premium on the prior day closed, which you could look at as a disappointing premium, you didn’t get anything. But I have a feeling that acquisition premium had already kind of been baked into the stock and so this was the deal that everyone expected to have happened.
Andrew Dittmar [00:27:22] And, you know, we think it makes strategic sense for Exxon when you back out the numbers again, most of the values on that key US business and kind of give them still some credit for their upstream assets. We think they got the pipeline cheaper than it would cost to build plus, trying to recreate that in this regulatory environment is going to be a long, drawn out, you know, a ten-year process so you have it today as opposed to a decade from now.
Andrew Dittmar [00:27:45] So we like the Gulf Coast. I mean, we think is the most promising area for us. Development, a great combination of emitters in the form of all the petrochemical industry that’s there, pipeline capacity and sequestration, and just the quality of the rock for putting carbon away.
Andrew Dittmar [00:28:04] So like the deal for Exxon being able to grow that cost business, to kind of supercharge it, I don’t know. It’s going to kick off a trend of these types of deals. There are just not a lot of boats out there like Denbury that you go by that’s kind of a typical follow-up question.
Andrew Dittmar [00:28:20] But there’s CRC in California that is looking at doing some carbon sequestration and I think has a JV on the table with Brookfield to develop that business a little bit better. But California has kind of a rough regulatory spot to get into.
David Blackmon [00:28:35] Sure is.
Andrew Dittmar [00:28:36] Not just oil and gas, but I’m not I’m not sure that that’s where the majors are going to focus their attention. And then TALOS has done some very early stage looks at it, building a cruise business. But I don’t think relative to the size of TALOS, that’s progressed far enough if you think of TALOS as really being a quasi-company, they’re a Gulf of Mexico producer that’s exploring this business line.
Andrew Dittmar [00:28:58] So on the corporate side, don’t see a lot of other acquisition opportunities out there there’s not a lot in the private, just the nature of some of these energy transition technologies like CCUS, It’s so engineering intensive, so capital intensive.
Andrew Dittmar [00:29:11] I think a lot of the development is going to be organic from the majors versus kind of the shale model of private companies doing the work and then looking to sell down the road.
David Blackmon [00:29:22] Well, that brings me to my next question has to do with capital, Warren Buffett was fascinated last week by his comments that he’s still looking to take an even larger position in certain U.S. shale companies Chevron was one of the companies mentioned Oxy obviously, he’s had a big position in ConocoPhillips, you know, and on and on.
David Blackmon [00:29:43] I wonder if the capital if you if Enverus and you think that the industry is going to be able to to maintain access to the capital needed to continue executing these kinds of deals going forward, to continue consolidating the U.S. shale space, because we know that there are all these firms that are really focused on denying capital to the industry. So I think that’s a legitimate question going forward aint it?
Andrew Dittmar [00:30:17] Yeah, it’s certainly something that companies are going to monitor, you know, retrospective Right now we don’t think capital availability is an issue in the industry that oil and gas companies are really being evaluated like they always have been. Is it a good economic investment?
David Blackmon [00:30:33] Yeah.
Andrew Dittmar [00:30:33] Now, some of the regulatory changes are certainly going to factor into that. If there’s a regulatory shift that changes the economics of the investment, you need to be thinking about that as you make a capital allocation decision. But it’s really this is the fundamental numbers of these companies. A good value proposition or not is how investors are looking at it.
Andrew Dittmar [00:30:51] If anything, we’ve probably reached, at least for the near term, kind of peak ESG or capital availability concerns in 2020 and 2021. And you had the latter one proposals with Exxon and a bit more noise there. So it does seem like overall that’s less of a concern than it was maybe a couple of years ago things tend to be flowing fairly smoothly at this point.
Andrew Dittmar [00:31:17] You know, the one area maybe that has been a little bit more challenging are some of the private equity guys going out and raising money. But there are so many different factors at play there, it’s hard to pinpoint and say it’s an ESG or a broader oil and gas opposition concern.
Andrew Dittmar [00:31:32] It’s sort of, I think, more maybe a piece of that but also you’ve had mixed results on the private equity side. Some in the Permian have been fantastically well. You’ve had some investments, other plays that haven’t panned out quite as great. So they’re looking at how are these investments actually performed.
Andrew Dittmar [00:31:50] I’d love to have the numbers on that. What is the average return on a private equity investment over the life span of shale? But I’d have to get a lot of private equity firms to hand over the family to.
David Blackmon [00:31:59] They may not want to share those numbers in some cases.
Andrew Dittmar [00:32:02] So would you be better off putting a dollar to work in private equity or public companies? You know, 2014 at the bottom of the price declines would be a pretty fascinating analysis.
David Blackmon [00:32:14] Sure would.
Andrew Dittmar [00:32:15] And there’s just a lot less opportunity for the private guys to go out you were leaving they have money mentioned that plays are relatively consolidated.
Andrew Dittmar [00:32:22] There are more benches to find in the Permian but that land most segregated is already controlled by someone. There are not new resource plays like the Delaware Basin in 2016 to go out and sort of delineate and flip so there are opportunities there.
Andrew Dittmar [00:32:37] I mean private guys and the like going back to some of these more mature plays like the Eagle for Western Eagle Ford and potentially in particular, you’ve seen some moving to private investments like in the Williston and some of the Rocky Mountain plays.
Andrew Dittmar [00:32:49] But I don’t think you need the big chunk of capital on the private side that you had in the early days of shale. And it was more of an emerging technology kind of trial and error. And you know, you had more opportunities to hit some real home runs there on the private side.
David Blackmon [00:33:02] Well, I got to say, from a selfish perspective, I’m a lot more interested in the Eastern Eagle Ford because I got a little family farm sitting on top of it. Yeah, there’s but it’s dry gas and it’s 13,000 feet deep and I just don’t think I’m ever going to get a lease on that stuff.
Andrew Dittmar [00:33:17] You just do, I guess, at 13,000 feet I don’t know. I’m not quite sure what to say but never think. Though there’ve been some deep gas wells drilled by Comstock over the Eastern Eagle for western Haynesville however you want to classify that region.
Andrew Dittmar [00:33:33] And definitely has some interesting portions on the Eastern Eagle for two, I think I say Western Eagle for just maybe work where more of the assets was for sale recently.
Andrew Dittmar [00:33:42] So but one of the one of the big deals in Q1 was wildfire buying Chesapeake’s Eastern Eagle for the asset. So that’s the old part of the old wild horse team now has been a bigger position they did Wild Horse they have all their old assets, plus Hawk, who it was kind of the other major player in that area. Magnolia is on the public side and still has their Austin Chalk and Everett inventory.
David Blackmon [00:34:06] They lost their shot and that resource has just been one of the most amazing resources in the history of the industry. Frankly, it’s had like four rebirths in the last 40 years. It’s an answer. So I’m going to give you a chance as we close out here to be right one more time. What’s your forecast for the rest of the year on M&A?
Andrew Dittmar [00:34:27] Yeah, I think near-term is a little bit more of the same. Get a few more of these big private equity exits in the Permian. There’s a little bit more running room left on that story. But pretty quickly after those are off the table, there’s just not going to be a lot of those deals left to find.
Andrew Dittmar [00:34:42] So I think companies really do start considering corporate M&A seriously and we get one or two potential corporate deals in there. I think gas starts to get interesting to people towards the end of the year. I don’t know if we have to wait till the beginning of 24 to see those deals or not.
Andrew Dittmar [00:34:57] But really well-telegraphed story that crappy gas prices are going to get righted eventually by US LNG. I think buyers are going to want to play assets ahead of that LNG ramp that we think is going to take place in 25.
Andrew Dittmar [00:35:09] So maybe the end of 23 as Permian deals kind of fall off because there’s not as much left to buy. Maybe some of these Haynesville and Appalachia deals start to step in to take their place and keep us busy.
David Blackmon [00:35:22] All right, man, I’m going to hold you to your word we’ll talk to you again in three months and we’ll see where we went in the Third Quarter.
Andrew Dittmar [00:35:29] All right. If it’ll make for it, make for an interesting intro.
David Blackmon [00:35:31] All right. Thank you so much for being with us today, I really appreciate it.
Andrew Dittmar [00:35:35] Yeah. Thank you for Hosting it was great chatting with you.
David Blackmon [00:35:37] And thank you to our Extraordinary Producer, Eric Parel, to the host of our show, The Sandstone Group, and Stuart Turley, appreciate you guys. And of course, our sponsor, the U.S. Oil and Gas Association really appreciates you all for doing this. And that’s all for today we’ll see you next time.
Please subscribe and give us a like wherever you watch or listen to the podcast.
Positive reviews are also welcome and appreciated!
IPAA is one of the industry’s oldest and most effective national trade associations, representing mainly the interests of small to mid-size independent producers.
Sponsorships are available or get your own corporate brand produced by Sandstone Media.
David Blackmon LinkedIn
Rey Trevino LinkedIn
David Blackmon LinkedIn
Irina Slav LinkedIn
Armando Cavanha LinkedIn
We would like to thank our sponsors and fellow traveling industry thought leaders.
Fellow Podcast Travlers:
Stu Turley, Host of the Energy News Beat Podcast.