Eight Oil & Gas General Counsel and Investment Bankers Talk M&A – Or the Sudden Lack Thereof

By Mark Curriden
(April 6) – Since 2009, energy companies and private equity firms based in Texas have been involved in more than 760 mergers, acquisitions and joint ventures.
The combined deal value: $546 billion, according to Mergermarket, an independent global M&A research firm that produced the data exclusively for The Texas Lawbook.
General counsel were swamped in M&A activity as upstream and midstream oil and gas companies expanded, acquired new assets, brought on new investors, merged with other oil and gas firms and then divested assets that didn’t quite fit with their portfolio.
“It was crazy busy for an extended period of time,” said Mark Berg, the executive vice president at Irving-based Pioneer Natural Resources and its former general counsel.

That streak ended during the first three months of 2015 when energy M&A plummeted by 55 percent from the first quarter of 2014.
M&A involving exploration and production companies is essentially non-existent, according to oil and gas general counsel. These chief legal officers say the drop from $100 a barrel oil to $50 is obviously to blame.
“Quiet is the right word when talking about upstream M&A,” said Greg Brown, the general counsel of Breitburn Energy Partners, which has its largest office in Houston. “Everyone – buyers and sellers – are getting their footing and adjusting.”
In extensive interviews this week, eight current and former general counsel at Texas oil and gas E&P companies told The Texas Lawbook that unstable oil prices have impacted their operations and the operations of just about every other upstream firm they know.

“We’ve been blowing and going for the past several years. We are using this opportunity to step back and take a deep breath,” said Denbury Resources GC Jim Matthews.
“Right now, we are completely focused on cost savings and doing things better and more efficiently,” Matthews said.
All eight GCs said they are already experiencing some minor budget cuts in their corporate legal departments or said they expected to face possible cuts later this year if oil prices stay low.
None expect to have to layoff any of their in-house lawyers.
“I think we will see some work that we normally would send to outside counsel being handled in-house,” said Brown, who has six lawyers in his legal department.
Mergermarket reports that there were 54 deals in the Texas oil patch during the first quarter of 2014 and that there were more than 60 such transactions in the third and fourth quarters each.
The total amount of M&A in Q1 of 2015: 24.
Nearly all of the two-dozen energy deals this year have involved midstream pipeline companies, not E&P operations.
“It is hard to get E&P deals done in uncertain times because the buyers and sellers are so far apart on the value of the assets in the ground,” said investment banker Rick Lacher, managing director of the Dallas office of Houlihan Lokey.
The general counsel agree.
“It is a buyer’s market, but a lot of sellers are hoping to be able to wait until oil prices recover a bit,” Berg said.
Berg and others said that many smaller and mid-sized upstream companies “have gone into the equity market to raise money” in order to have the cash needed to weather the storm of lower oil prices.
“Because of it, producers are not being forced into the M&A market as they would have been in the past,” he said.
GCs said that they expect M&A activity to return later this year when E&P companies are forced to perform their redetermination of the value of their reserves. The new redeterminations will be based on the average price of oil during the six previous months.
If banks decide that upstream companies are too over-leveraged compared to the value of the reserves, the oil companies will have three choices: file for bankruptcy, sell assets to raise cash or add a private equity firm as an investing partner.
“For a lot of mid-sized and smaller oil companies, redetermination later this year is going to be a very difficult time, especially for those companies that are highly leveraged,” said David Poole, the general counsel at Fort Worth-based Range Resources.

Poole and others said that they expect there will be a flood of M&A deals in the fall during the redetermination period.
“Banks are giving E&P companies a pass right now, but the screws will get tightened if oil stays low and debt remains high,” said Brown, the GC at Breitburn. “As buyers and sellers get used to the new normal or the new state of reality regarding oil prices, some companies will feel more comfortable selling assets.”
Meanwhile, private equity firms have been raising record amounts of cash to snatch distressed debt, Brown said.
In an interview last fall as oil prices were rapidly declining, Riverstone Holdings General Counsel Stephen Coats said that private equity firms such as his are always looking for a good economic deal, but he said that is not the only key factor.
“In long term investments, the value of the assets in the ground and the quality and experience of the management teams are of premium importance,” he said.
Poole and other general counsel point out that private equity firms may not be the only big spending buyers this fall.
“Clearly, the major oil and gas companies have a lot of cash to make an acquisition, but they don’t seem too anxious at this point to make such a move,” Poole said.
“But for right now, I don’t see a lot of strategic buyers doing oil and gas deals right now – only those companies that are doing it for financial reasons,” he said.