Tuesday, March 20, 2012

Have the Fire Sales Begun?

On Friday, Atlas Energy announced that its subsidiary Atlas Resources Partners, LP had acquired approximately 12,000 net acres representing 277 Bcfe in the Barnett Shale from Carrizo Oil and Gas for $190 million, which equated to a purchase price of $0.69/Mcfe of proved reserves.  The sale was only a portion of Carrizo's holdings in the Barnett, but is the price tag indicative of things to come?

In the past, I've made light of "yard sales," especially by Petrohawk, which offloaded valuable but unsexy assets like legacy producing acreage and midstream assets to raise cash before selling out to BHP Billiton.  When does the yard sale become a fire sale?  I guess when you are raising money to stay in business, not just fund your drilling plan.  I don't mean to cast aspersions on Carrizo, but, as Atlas points out in its press release, 69 cents per Mcf is 60% cheaper than other recent Barnett deals (although there may be an apples/oranges issue). Carrizo is a going concern and remains active in other plays, but I doubt management was eager to offload this acreage.

While a cheap price, this probably counts as a yard sale rather than a fire sale, but are fire sales coming?

The Atlas/Carrizo deal was for gassy acreage, but the value caused Atlas' stock to pop by 23% on Friday.  The net gain was 30% by market close on Monday. Clearly the market likes companies to buy cheap assets with good future value. Surveying the horizon with these exceedingly low gas prices, I imagine there are many juicy assets out there held by companies that are now struggling.

While the independents are dropping gas rigs and curtailing production, some of the big boys (notably Exxon, Chevron and ConocoPhillips) are saying that they don't intend to cut gas production.  Hey, that's not being a team player!

While each company chooses its own path and the big boys have a much longer time horizon and significantly deeper pockets, the more paranoid among us might be wondering if, by not helping to abate low natural gas prices, they are cheapening up some tasty assets to pick up later.  The E&P cycle is well known for smaller independents taking the initial risks and the big boys coming in to mop things up, but the speed and scale of shale gas development and its global economic and geopolitical impact is largely unprecedented.  I would not be surprised to see some big deals (at good prices) before the end of 2012.

My guess: there will be blood.

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