The lack of drilling activity in RR Districts 1-6 continues as the price of WTI slips to $43.79/bbl. (at the time of writing), which is a 17% decline since my last report. The pace of M&A activity and asset sales remains slow as buyers and sellers continue to disagree on price while oil continues to go lower. I expect that by the time you read this article there will be a significant increase in M&A activity as a result of companies being forced to merge or sell assets in an effort to cut costs and avoid bankruptcy. In the last few months there was significant M&A activity in the region to make note of: Noble’s merger with Rosetta Resources, and three significant asset sales 1) Marathon sold its East Texas properties along with property in other areas for $100MM, 2) Penn Virginia sold its East Texas Haynesville assets, and 3) Goodrich sold its Eagle Ford properties. In the months to come further M&A activity is anticipated along with the possibility that more companies will announce companywide layoffs.
However a few trends emerged over the last quarter that are worth mentioning. Companies in the “Sweet Spots” continue to drill and complete wells in those plays that yield a return above their breakeven price. Well hedged companies continue to boost their production while the hedges in place add the needed cash to the bottom line. There were increases in the number of wells drilled, but not completed (no fracking or drilled uncompleted “DUC”). Such companies will complete these wells later in the year or in 2016 as prices recover. We anticipate that once these wells are complete, the need for division order curative work will increase, as well as the need for surface access for new facilities and the gathering lines required in order to get the product to market. It has been reported that companies are more active in extending and renewing leases. RR Districts 1-6 has such a rich and long life reserve base that it will continue to keep companies and landmen busy for years to come.
Now, if you remember in my last report, I said that Landmen, both in-house and field hold the “Keys to the Kingdom” – not our technical counterparts, as some may have you believe. I think it is important to acknowledge this, especially since many landmen are out of work and may be concerned about their future in the industry. Let tell you why you are more important now than at the beginning of the Shale Revolution – with lower oil and gas prices, companies have significantly less money or CAPEX for drilling. Therefore, they are unable to maintain their large inventory of leases through the drill bit as originally planned. One way they hope to keep their valuable assets together is with the skills of both in-house and field landmen. Company landmen will need to creatively form units to hold their key acreage. This will entail trading acreage with other operators, farming out or entering into other well trades. Company landmen will need to obtain financing for drilling activity, renewals or extension of leases by negotiating joint venture or participation agreements with other companies or investors. Field landmen with their knowledge of title and relationships with the landowners will need to negotiate lease amendments, extensions, renewals and other contracts to supplement the efforts of their in-house counterparts in order to ensure that the company’s valuable leasehold are not diminished. Keep in mind, the reserves that companies represent to Wall Street are based upon having the acreage that contains those reserves so a loss of key leasehold would result in a lower value for the company.
In closing, I recommend you keep your skills sharp because the industry needs you and this decline in activity will be over before you know it.
Written by: Randy H. Nichols, CPL, Founder & CEO of Cinco Energy Management Group.
This article was originally published in Landman 2, American Association of Professional Landmen (AAPL), September 2015, Vol. 13 No. 4, 27. Mr. Nichols has been writing the Field Report for AAPL, covering the Texas region, since 2012.