November 01, 2018

Texas Groundview: Private Equity Hold 'em

Abby Roberts, Director, Merrill Insight™ | November 01, 2018

A conversation with Nick Renter, Senior Director DatasiteOne, on M&A market and due diligence trends in Texas.

Q: What does the Texas M&A market look like?

It’s been an interesting year. Overall, the deal count is down yet the enterprise value of energy transactions is up (thanks to a handful of massive transactions). You have large companies such as BP and Marathon making strategic acquisitions. But a lot of private equity money is being put into production (and not necessarily trading horses).

The big news around here is BP agreeing to buy BHP’s Petrohawk assets for $10.5bn in July. That’s exciting! Also, Ensco’s all stock merger with Rowan is huge. Maybe we’ll start to see some of the major E&P M&A deals start to divest non-core acreage. In general, my sense is there will be some minor consolidation in the basins, but unless there’s a major move in energy prices I don’t know what the catalyst for more activity will be.

Q: Why is private equity continuing to invest in energy? 

Private equity saw domestic E&P as an interesting investment opportunity a few years back - and then prices sank. As a result, you had a lot of companies teetering on insolvency. The private equity equation was either to double-down on their original investment or take a loss.

If private equity had cash they doubled-down, knowing commodity prices would come back. That’s why we didn’t see a massive wave of distressed selling 18-24 months ago when commodity prices were at their lows. From my perspective, I didn’t see carnage (at least not at the level I expected).

The big question is, when will private equity sell? It’s a tough thing – you don’t want to sell your winners because they’re winners and you don’t want to sell your losers because they’re losers.

Q: Any new trends you’re seeing? 

PE-backed companies are now focused on drilling and need to show production before considering going to market. Eighteen months ago, all you needed was solid acreage production and, in some cases, you didn’t even need to drill a well. Flips are slower these days, as folks are required to prove up their acreage.

Q: What are the major due diligence challenges in your market?

Different sectors have different levels of disclosures. In Energy, everyone wants to do a deal in 90 days, but, because of regulatory issues, due diligence is harder than ever, with more information needing to be disclosed. Bankers also are trying to take assets to a broader base of buyers, while sellers struggle to keep tight control over information, adding even more complexity to the process.

I call this tension between deal speed and complexity the Diligence Paradox.

The result of the Paradox is the due diligence platform becomes the defensible source of truth for both the sell- and buy-side. Sellers need to know their data is being maintained and tracked with respect to all applicable laws while facilitating expeditious and comprehensive diligence. And at deal closing, suddenly that flips; the platform is used to defend what information was – or wasn’t – disclosed during the deal process. This is of keen interest to both the buyer and the seller.

The information management challenge is particularly acute for energy deals because a lot of technical data gets disclosed. For instance, well logs can include hundreds of thousands of pages of data. You have to know how to bundle and compress that data in a way that makes for a great experience. Similar with shapefiles.

Q: What is the Merrill difference?

We’ve surrounded ourselves with an experienced team who really understands the industry – both our Regional Sales Directors in the field and our service teams in St. Paul / London. Even the most active banker does maybe 12 deals a year; each of our project managers handles many more than that. 

Our Project Management team understands the challenges of an energy process and how to bundle and present well logs, technical data, etc. A few active clients run processes themselves on Merrill DatasiteOne and rely on the Merrill team for project management support – that’s how good the team is.

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