It’s not much fun to be the general counsel of a company that’s going through a sale process, which, if successful, would most likely put that person out of a job.
But RSP Permian’s former general counsel Jim Mutrie handled his company’s $9.5 billion sale to Concho Resources last year like a pro, leading him and his outside counsel Vinson & Elkins to be a finalist for the M&A Deal of the Year Award by the Dallas-Fort Worth chapter of the Association for Corporate Counsel.
“The acquiree has a fiduciary duty to maximize the asset while realizing they’re working their way out of a job,” said David Kilpatrick, VP of business development and general counsel of EnvironX and a judge for this year’s competition. “So the ability to maintain professionalism is key.”
Darwin Bruce, president and CEO of Capital Market Ventures and another judge on the panel, agreed, saying the seller’s responsibility is almost more difficult than the buyer’s. “There’s a lot of underlying work, including who is the best buyer, who is the best fit and how to structure a deal with an entity that’s sustainable going forward,” he said.
The Concho-RSP deal had another distinction: It was one of the first of a wave of consolidation deals in the oil and gas industry at a time of higher oil prices – and the largest M&A deal ever in the history of West Texas’ and New Mexico’s Permian Basin.
Mutrie tapped his old firm V&E to help with the task with a team led by partners Doug McWilliams and Steve Gill in Houston. Other team members included partner Lande Spottswood and associates Leonard Wood, Jing Tong, Mariam Boxwala, David Bumgardner, Maggie Webber, Andrianna Frinzi, Michael Pascual and Ryan Rivera.
Specialists included partner David D’Alessandro, senior associate Dario Mendoza and associate Steven Oyler on executive compensation/benefits; partner David Peck and associate Megan James on tax; partner John Grand on oil and gas; and counsel Larry Pechacek on environmental.
V&E’s Spottswood pointed out that not only is Mutrie an V&E alum, so is Will Giraud, Concho’s former general counsel who is now chief operating officer. “We’re blessed that our clients are our alumni,” she said.
She said that RSP’s and Concho’s management knew each other very well and their assets overlapped each other, so it was easy to get the deal done. “The two management teams had a lot of respect for each other and there was a logic of putting those asset bases together,” she said.
The Texas Lawbook caught up with Mutrie in Grand Cayman, where he was enjoying a post-Christmas vacation with his family before he makes his next move after his six-month non-compete agreement expires.
“I worked hard at RSP, so I’m taking time off and spending time with my family,” he said. “I have time to make up, including with my five-and-a-half-year-old son.”
Mutrie said RSP wasn’t looking to sell, but Concho approached the company about a possible combination a few years ago.
“It was very informally expressed, nothing with the board or with numbers, nothing in writing – ‘If you’re interested in selling, please keep us in mind,’” he said. “Never did we feel like it was pushy or a bear hug or anything like that. Because of that informal indication and how well our properties fit together on a map, we always thought they’d be one that would make sense.”
Another company that had shown interest in RSP over the years, called “Company A” in the deal’s proxy materials, made a more serious expression of interest this past February, a couple of weeks after the NAPE conference in Houston.
“They went from verbal to something in writing quickly that we brought to our board and started to consider,” Mutrie said. “But because Concho had always expressed soft interest, we went back to them and said we had received another offer that we had to consider because it was close enough that it could be attractive to our shareholders.”
Mutrie said the company still wasn’t looking to sell, but as a public company, it had to consider offers that were made. But management also thought it might be the right time to transact.
The company had a lot of acreage to develop in the Delaware Basin after its $2.4 billion acquisition in 2016 of Silver Hill Energy, which was backed by Kayne Anderson and Ridgemont Equity Partners. But the Delaware had less infrastructure than the Midland Basin, where RSP had been operating, and would require a lot of capital to develop it and efficiency to bring it forward, Mutrie said.
“You would have to go from two or three well pads to eight or even 12, invest in tank batteries much larger than we’d ever imagined and build pipelines,” he said. “We didn’t have the balance sheet to support multiple pads at once and the market doesn’t like to see production on a roller coaster ride.”
RSP only had a $7 billion market capitalization, but Concho and RSP together would be a $35 billion company, which would result in a lower cost of capital that could fund multiple drilling spots and ease big production swings.
“We didn’t have any doubts about the assets. But what investors were focused on was free cash flow and running as leanly as possible and our balance sheet couldn’t support big pads and the impact on production,” he said. “So we told Concho that we weren’t looking to sell but we had a real offer, ‘So speak now or forever hold your peace.’”
Both bidders were pure-play exploration and production companies in the Permian, which RSP liked, but Concho was bigger and RSP felt like it had the balance sheet to develop the assets.
Concho came back with a higher offer, and there was some back and forth after that, but Concho ended up the winner. “We believed so much in the assets and their future development, they fit well with Concho’s and Concho had the balance sheet to develop them,” he said. “We felt like Concho was the best fit.”
Mutrie said there were moments of tension and anxiety around exclusivity – both bidders wanted it right away, but RSP pushed back – and also around “getting to the number” that would be attractive to shareholders.
“They were both pushing for exclusivity and we were reluctant to go there, but we decided if Concho went above a certain number, we would be exclusive with them,” he said. “They cleared that number, we did due diligence and signed a purchase agreement, all within a week.”
Why did Mutrie go with V&E? Not necessarily because he used to work there (he only spent three-and-a-half years at the firm, and in the Dallas office, not Houston). He said the firm had a familiarity with the company, as it took it public and served on and off as company counsel, mostly on capital market transactions.
“They are one of the top energy firms and one of the best capital markets firms and work on some of the best M&A deals as well,” he said, noting the firm’s advice to Rice Energy on its similarly sized purchase by EQT. “They did a good job with the transaction.”
Mutrie thinks there will be more combinations in the oil and gas exploration and production industry in 2019.
“There are too many small to midcap companies in the Permian and in the E&P space overall to efficiently develop these assets,” he said. “It’s all about capital efficiency and operating within cash flow, and to do that, you need a larger balance sheet and the cost of capital has to be low. When you consolidate, you get rid of a bunch of the G&A. That’s what shareholders are screaming for and you’ll see that.”
Mutrie said it’s a little bit of a stereotype that company leaders sit around talking about deals at industry conferences, but that’s how the Concho-RSP deal really got going.
“It’s not just industry parties,” he said. “It was our CEO talking to [Concho CEO] Tim Leach. It’s all about CEO’s talking. It truly helped our shareholders in the premium they received, keeping it competitive as a two-horse race, with each knowing they had a competitor.”
Even given the competitive nature of the process, the deal was still accretive to Concho, Mutrie points out. “It wasn’t anyone pulling something over on the other. It had a competitive dynamic,” he said. “Once it got serious, it was very easy for our board to outline the criteria of what they were looking for. It made it easier to come up with what was fair for each side.”
Mutrie said RSP, with the help of V&E, kept the process moving to an eventual agreement. “We wouldn’t let anybody drag their feet unnecessarily,” he said. “We had a number to transact on, and it did no one any good to waste any time. There were only six people who knew about the deal and we kept that universe extremely tight.”
Given his noncompete, Mutrie has some time to look at different work possibilities going forward. One could be building up a private company at a time of lower oil prices and eventually taking it public, given his love for capital markets work.
“I was very fortunate how I did at RSP. It put me in a good spot, so I’m sitting on the sidelines, listening to some opportunities,” he said. “If you’re going to start something new, lower oil prices are not the worst thing in the world – far from it.”