After heavy transaction volume in the first quarter, A & D has stalled out at the end of the second quarter. With the vast amount of data and the fantastic software that is available to sort it, we have seen many of the companies dig into the same areas, looking at the same rock, and target the same assets. With this focus, the availability of assets has become scarce. Those that have the acreage to develop have now turned inward and begun drilling programs, highlighting potential plugging liability and planning through 2018, using the price deck of today.
We expect any quality rock within these highly targeted areas that hits the market to be purchased for far more than the current values that exist per acre. As the market begins to see that the target area has limited availability, the deals will rise and fall with the price of oil and gas. We also expect some private equity exit strategies to start taking shape. If gas and oil trend upward, we may see some of the companies that made large asset purchases earlier in the year flip non-core acreage and production.
Companies are still focused on the trade. Trading non-core acreage into core acreage has been the highlight of the divestiture culture so far this year. We expect that to continue, regardless of commodity pricing. Once cored, the acreage is being proven (if need be) and developed. This process is heavily dependent on commodity pricing, company focus, available budget dollars and service prices. Completion costs have steadily risen for the past six months, and frac schedules (in specific areas) are full, driving prices higher.
We expect many companies to reevaluate their acquisition strategies over the next 18 months. Finding the assets has become the key. How can they find targeted rock? There will be a continual focus on current cash flow, how to lower expenses and how to use today’s technologies in yesterday’s wells.
This will take more time to engineer, more time to evaluate and more time to transact. If and when the good rock hits the market, it will move fast. Everything else is moving at a much slower pace. And unless you know where to find off-market assets, the A & D market will continue to look like this for the rest of 2017.
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