2017 has been a positional build year, as we had expected. As deals slowed down, dollars were reallocated to development projects. As the calendar rolled into 4Q17, many companies are still looking for deals. But unless companies are overpaying for Delaware Basin assets or buying clearance priced wells, deals are very difficult to find.
The acquisitions and divestitures market will be heavily focused on natural gas deals in 2018 – especially if the trend toward $4 continues – and bolt on positional blocks and trades. The majority of the large dollar deals will continue to be spent on the midstream assets that help build on the long-term strategies of specific acreage positions. The focus will continue to be in the Delaware, however, the midstream companies will start to really battle for MCF/D and in 2018 the operator will finally start to see some relief on an operational standpoint because of the competition. Because of this cost savings, wells that were in the red in 2017 may be in the black in 2018, and become better acquisition targets.
If oil continues to rise and is able to stabilize at $55 – $65 in 2018, we expect companies will look to immediately clean their portfolio of assets not defined as core. Expect 1Q18 and 3Q18 to be filled with a number of smaller deals that help core up these companies, as NAPE and Summer NAPE will push these deals into the spotlight. We expect a significant amount of new prospects to emerge in the Permian, Eagleford and Niobrara that will place focus on expanding the current borders outward.
In 2017, we saw companies move from a diversification of assets to operational efficiency. If a company cannot operate efficiently, they looked to divest. In 2018, we will see these companies put these deals to market at a transaction friendly price. Many private equity backed companies will look to exit in 4Q18 and 1Q19 if prices are $65 a barrel /$4 MCF.
Drilling will start to be more and more of a topic, as leases taken in 2015 start to expire. Available labor force, timing of drill rigs, operational costs will all be taken into consideration in 2018, as flipping acreage may be the only option for some companies that can’t get to every acre with a commitment.
We expect 2018 to be a banner year. Operationally, the cost to drill has come down significantly. The STACK/SCOOP/MERGE area in Oklahoma is continuing to prove successful. Delaware acreage is becoming harder to find, causing operators to flip what they have to block their positions as is. This will increase the drilling in New Mexico significantly in 2018. Permian has cooled, and development will continue to be the focus, not acquisitions.