Texas Pacific Land Corporation (TPL)

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Land Buyers Stampede Into Texas Oil Patch (8/25/16)

Wall Street’s rush to Permian Basin is sign that long-awaited recovery in oil and gas prices may be in the offing

By Ryan Dezember and Corrie Driebusch

Oil prices are mired in their worst slump in decades, but you wouldn’t know it in West Texas, where a land grab has energized an otherwise dormant market and sent some explorers’ shares soaring.

Blackstone Group LP said Thursday that it has agreed to invest $1.5 billion in a pair of drilling deals there. One came about after the New York investment firm early this year lost out to a big oil company bidding on about 12,000 acres south of New Mexico. Blackstone didn’t walk away from the auction empty-handed, though, having persuaded the sellers to join it in a new billion-dollar drilling venture in the area.

The firm also committed $500 million more to another group of experienced oilmen who had purchased 16,000 acres about 100 miles to the northeast, in another section of the region’s red-hot Permian Basin.

Cash for the deals came from an $8 billion pool that has otherwise sat largely untapped since Blackstone raised the money to invest in energy early last year.

Wall Street’s rush to the Permian is a sign that the long-awaited recovery in oil and gas prices may be in the offing. In some cases, Permian drilling properties are fetching prices that exceed those paid when oil prices were above $100 a barrel two years ago.


“It looks like we’ve come out of the trough portion of the cycle for the oil-and-gas sector and are on the road to recovery, though the road will likely be winding and it will take some time to get there,” said Angelo Acconcia, who oversees Blackstone’s oil and gas investing.

Private-equity firms like Blackstone, which invest on behalf of big clients such as pensions and endowments, have largely sat out the oil bust despite amassing hundreds of billions of dollars to spend on energy investments. But the Permian is luring them off the sidelines.

Other big investors, including Wilbur Ross’s WL Ross & Co., EIG Global Energy Partners and Apollo Global Management LLC, have bought discounted debt of troubled Permian producers in hopes of seizing their assets or profiting should they recover, The Wall Street Journal has reported.

Roughly half of the $25.5 billion that has been paid this year for U.S. onshore drilling properties has been spent in the Permian Basin, according to RBC Capital Markets.

Investors have cheered these deals, snapping up $6.25 billion of new shares sold this year by oil producers who have said they would use proceeds to acquire Permian properties. Shares sold in each those 16 deals are trading above their offering prices, a sharp contrast from a year ago when many of the shares sold by energy producers lost value as crude prices fell further.

It took Concho Resources Inc. and Parsley Energy Inc., two companies that drill only in the Permian, about four hours each to sell a combined $1.6 billion worth of new stock early last week to pay for deals they made to boost their share of the region’s shale. Parsley’s bankers received orders from investors for more than four times the number of shares it sold in the offering, its executives said.

“There’s this one corner of the world, the Permian Basin, where investors will keep financing you to keep on acquiring,” said Bryan Sheffield, founder and chief executive of Austin-based Parsley, which has sold stock to buy land five times since 2014.

On Tuesday, PDC Energy Inc., which has drilling operations in the Appalachian and Rocky Mountains, said it had agreed to buy $1.5 billion worth of Permian fields from a New York investment firm. When the stock market opened the next morning, PDC’s shares shot up and executives, on a late-morning call with investors, said they would likely sell stock or bonds to cover the cost before the purchase is finalized. PDC shares are up 6.9% since its Permian foray was disclosed.

“It’s like musical chairs,” said Bill Costello, a portfolio manager at Dallas investment firm Westwood Holdings Group Inc., which manages about $20 billion. “At some point in time, there’s not going to be a chair, and [oil producers] want to make sure they have a seat.”

But some investors remain uneasy. In the two years since the oil slump began, prices have rallied several times only to fall again, stinging investors who piled in early.

At an industry gathering in Denver that began the morning after Concho and Parsley announced their acquisitions last week, talk among investors centered on whether the market for West Texas drilling fields was getting too frothy, said Charles Robertson II, an analyst at Cowen Group Inc.

“Some are starting to feel like this is a bubble,” he said.

U.S. crude for October delivery rose 56 cents, or 1.2%, to $47.33 a barrel on Thursday.

The same stacked layers of energy-bearing rock that make Permian wells productive enough to be worth drilling at low oil prices complicate comparisons between deals. Analysts and investors say oil companies these days are generally having to pay up for deeper, more lightly explored layers that used to not be included in purchase prices and may not be drilled for many years.

Yet others note that drilling costs have come down by as much as half in the Permian as companies learn how to extract more oil from each well, often by drilling horizontally through oil-rich rocks for nearly two miles. That is twice as long as was typical just a year ago and has required producers to lock up ever larger swaths of land—albeit at increasingly higher costs.

“The Permian has attracted so many new entrants that the competition for these deals is really at a fever pitch,” said Price Moncrief, vice president of capital markets and strategy at Concho, which in January made the $360 million cash-and-stock offer that beat out Blackstone for the West Texas land it tried to acquire.

http://www.wsj.com/articles/land-buyers-stampede-into-texas-oil-patch-1472165663