It’s been a busy time for mergers and acquisitions in Texas, particularly in the oil and gas industry. And over the last month or so, two Houston lawyers each handled three large transactions that together were worth more than $21 billion.
Baker Botts partner Josh Davidson advised EnLink Midstream on its $13 billion acquisition of EnLink Midstream Partners announced Oct. 23 (his co-lead was partner Preston Bernhisel in Dallas).
Davidson also counseled Chesapeake Energy Corp. on its $3.977 billion purchase of WildHorse Resource Development Corp. announced Oct. 30 (with partner Clint Rancher in Houston) and Valero Energy Corp. on its $2.2 billion acquisition of Valero Energy Partners announced Oct. 18 (with partner Jeremy Moore, also of Houston).
Vinson & Elkins partner Steve Gill also scored three deals over the past month. He advised WildHorse on its $4 billion purchase by Chesapeake (along with partner Doug McWilliams) as well as Denbury Resources on its $1.7 billion purchase of Penn Virginia (with partner Jeff Floyd).
“Just saw Steve and he looks a little tired,” V&E corporate department chief Keith Fullenweider said in an email Oct. 30 when the WildHorse-Chesapeake deal was announced, which occurred only two days after the Denbury-Penn Virginia transaction was revealed.
The next week, V&E said that Gill also advised the special committee of Owens Realty Mortgage’s board on its $175 million purchase by Ready Capital Corp. with one of the firm’s partners in Washington, D.C., creating a $678 million company.
When the The Texas Lawbook caught up with Gill after the Owens deal, he admitted, “I’ve finally gotten reacquainted with my bed.”
Gill said he was able to handle back-to-back deals because of V&E’s practice of having at least two partners on any one large transaction.
“It’s what you always worry about when you represent different people on different deals: The time frame never sticks and the ending is always frantic, which is when you lose your sleep,” he said. “It was one of those dumb lucks that they all hit around the same time, but we were prepared.”
Baker Botts’ Davidson also noted the co-leads on his three transactions. “Don’t give me all the credit for these deals,” he said. “I’m the senior guy who helped land them, but younger partners were also involved. There’s a division of labor.”
On the EnLink deal, for example, Davidson handled higher level issues and master limited partnership, or MLP, matters while Bernhisel was the “day-to-day guy,” handling the execution of documentation and analysis on a lot of issues.
Davidson said the MLP deals took several months, as the parties had been thinking of doing the simplification transactions for awhile, while the Chesapeake-WildHorse deal had been in the works for a couple of months.
Gill said the Denbury-Penn Virginia and Owens Realty-Ready Capital deals took several months, as both had announced reviews of strategic alternatives, while the work on the WildHorse deal was shorter.
How did they each bag their trio of deals?
Gill said Denbury called him because he had worked on a lot of large E&P mergers, even though their usual counsel is BakerHostetler partner Don Brodsky (Brodsky worked on the financing aspect of the merger, he notes).
WildHorse is backed by NGP, which is a V&E client, and is led by the same management team as Memorial Resource Development, which Gill represented on its $4 billion sale to Range Resources. The firm also worked on WildHorse’s initial public offering two years ago.
The Owens deal came because of V&E’s hiring of Hunton & Williams’ real estate investment trust team two years ago, Gill said.
“So one was by reputation, another was someone who returned to us for another big deal and another grew out of our acquisition practice,” Gill said. “We wouldn’t have gotten the [Owens] deal but for the REIT guys coming on board.”
Davidson said EnLink – and its predecessor Crosstex Energy – had been a Baker Botts client for 15 years. And Valero has been an on-and-off firm client since he arrived at the firm in 1985 after graduating from Harvard Law School.
Two of the three deals involved simplifications of MLP’s, and Davidson has done a lot of them, including some attempted ones. He’s working on another now that should be announced before the end of the year.
What do the energy transactions say about the state of dealmaking right now?
A lot of E&P companies combining these days are having to spend more time convincing shareholders of their marriages to win approval, the Tulane Law-trained Gill said.
For example, he notes that Denbury said on its conference call that it would be meeting with New York investors to talk about the reasoning behind the deal – particularly using enhanced recovery techniques on oil and gas fields in South Texas’ Eagle Ford shale, which was rather new.
“It used to be that you would negotiate a deal, prepare a 12-page power point presentation and host a conference call,” he said. “There’s now more investor skepticism about deals, so I think road shows will be important on a go-forward basis.”
Davidson said the simplification transactions show that the master limited partnership model doesn’t work for corporate sponsors anymore, given that the capital markets have been closed to MLP’s for financing.
“There’s not a lot of new money coming into the sector, the yields have gone up and it’s more expensive to raise capital,” he said. “They also have shifted more to an organic growth model, which have lower growth rates, and are trying to live off internally generated cash flow.”
Davidson said most of the big simplification transactions in the MLP space have already been done, although there are some smaller ones that might follow. There also may be some third-party M&A in the space, as was seen last year when Zenith Energy U.S. bought Arc Logistics for $320 million (Davidson advised Arc Logistics GP’s conflicts committee on that one).
As for the recent phenomena of oil and gas exploration and production companies consolidating, Davidson said oil prices had stabilized somewhat and stock market valuations were good enough that companies felt comfortable with their currency.
How much more will there be? “I don’t know, but I wouldn’t be surprised to see some more,” he said.
Gill also believes there will be more deals in the exploration and production space, with smaller companies consolidating or being consolidated because scale does matter at this point in their development. “They will just have to convince their shareholders,” he said.
Gill thinks a little cash may be involved in these deals, when before stock-to-stock transactions were the norm. “Some investors will want to continue with upside in a tax efficient way while others will want to take cash off the table or a portion of it,” he said. “It’s like a sweetener.”
Oil prices have been dropping recently, which concerns both Gill and Davidson. “If oil prices would stabilize, there’s a lot of pent-up demand for transactions, not just in M&A but also in capital markets,” Gill said. Adds Davidson: “A further slide in commodity prices would not be helpful.”
The debt market has been mostly open to the oil and gas industry, but the equity market – including secondary stock offerings and initial public offerings – has been largely closed.
Will it reopen soon? Davidson thinks so if the stock market stays strong.
“At some point, people will need more external capital and don’t want to lever up too much,” he said. “Private equity also has a lot of assets and they may seek to monetize them through IPO’s.”
Davidson said he’s working on several non-IPO deals right now and that his firm has confidentially submitted an upstream IPO.
With the midterm elections over and industry fundamentals improving, Gill expects to see more capital markets activity in the first quarter of next year, including more follow-on offerings and IPO’s than debt offerings.
“It’s been slow in the second half 2018,” he said, “so the first quarter should be raring to go.”