By Nate Trela
As upstream energy companies continue to focus their spending on the most economic plays in North America, some gassy positions once considered backbone assets simply do not compete for capital.
But the production and potential in two Rocky Mountain plays that lost favor with large listed companies - the Piceance Basin inn Colorado and the Green River Basin in Wyoming - are attracting serious private equity attention, according to several industry sources.
"There are good assets available," Brian Boonstra, Finance & Acquisitions Chair for the law firm Davis Graham & Stubbs, told Mergermarket, noting that he has been talking to groups trying to put together PE-backed ventures to buy gas assets in the Rockies. "I don't see those being the focus of some of the larger independents, and it may be we see more of the smaller transactions, to try to assemble some positions. But there's a sense of optimism."
The Rockies by Rick Kimpel
Boonstra declined to talk about potential targets or bidders, but a sector banker and an executive said attention is sharpest on the Piceance assets of Encana Corp. and QEP Resources' Pinedale anticline position in the Green River Basin. The economics and scope of both plays are strong, but the low price for natural gas makes it tough to compete for capital from the multi-basin players, they agreed. However, while public companies have trouble justifying spending on natural gas over oil, PE can acquire, prove up and wait a couple years, the executive said.
Encana's position - containing more than 700,000 acres in northwest Colorado - has fallen out of favor as the company now directs 98% of its capital program to four other plays: the Permian, Eagle Ford, Montney and Duvernay. The banker, an executive and a lawyer familiar with the play and the public outline of Encana's strategy said that while they had no first-hand knowledge of the company's plans, several steps the company has taken - including the wind-down of a JV with Nucor that restricted when drilling happened on the Piceance property - were signs the assets could come up for sale soon. The executive said he would be "stunned" if there was not at least a soft process under way by the end of 1H17. A recent report that Encana could drill new wells there in 2017 could also be part of that process, boosting production, he said. The banker said valuation could approach the $910 million Terra paid for WPX Energy's assets in the play last year.
An Encana spokesman said the company would not comment on the Piceance assets specifically or on potential divestitures. Encana has made lowering its debt and refocusing on its "core four" plays a priority, and it cut its net debt by more than $3.5 billion between the end of 2014 and its 3Q16 earnings release. It also reported at the end of the quarter that it had more than $750 million cash on hand and an undrawn $4.5 billion revolver, while still stressing its interest in further strengthening its balance sheet on its earnings call in November.
QEP's position produced 261m cubic feet equivalent of gas daily in 3Q16, according to a company news release. While QEP is in a strong position with cash on its balance sheet and an undrawn revolving credit line, the company would benefit from simplifying its focus from its four current core onshore US plays, the exec said. It could also use the proceeds from a Pinedale sale to ramp up development elsewhere, the executive said. The banker said the asset could fetch more than $900 million based on recent deals.
QEP CEO Charles Stanley said on the company's 3Q16 earnings call in November that it was not running a formal process for the asset, but optimizing the company's portfolio was always an ongoing process.
Ursa Resources Group II, a PE-backed venture in the Piceance since 2011, could be either a buyer or a target depending on management's vision, the banker said. The banker noted that Ursa is probably mature enough to sell, and Ursa Vice President Don Simpson told this news service last month that the company is getting approaches, but is not actively seeking an exit at this time. He said low gas prices make it an attractive time to buy and the company was still interested in bolt-on deals in the play.
Other potential buyers in the region include Black Hills, Laramie Energy, Terra and Sabinal Energy, according to the banker and executive.
Terra and Laramie already have positions in the Piceance that make them among the play's largest producers, and may not be able to swallow a large asset again, the exec said. Sabinal is looking for its first core asset and previously indicated gas assets in the Rockies were of interest. And Black Hills - whose operating divisions include and upstream oil and gas company and utilities - has previously stated its interest in acquiring natural gas reserves for its power plants.
Nate Trela covers the energy sector for Mergermarket and Dealreporter from Denver. He can be reached at nate.trela@mergermarket.com.
