Smashco’s and the way forward

Not all Smashco’s are created equal

This week, it was officially announced that Ameredev was the successful "bidder" for Advance Energy Partners (or, said another way, was selected by Encap to maintain their existing exposure to the Delaware basin and become the largest remaining PE backed private in the Delaware but...tomato tomato). The deal creates a $4 billion company, which is truly an amazing feat, considering Ameredev's humble original $400 mm commitment.

Our little OneEnergy was founded in 2016, at roughly the same time as Ameredev II, Tap Rock and Colgate, so there is a special place in my heart for what becomes of each company. Their teams and financial partners are best in class, and each weathered 2020 like champs. Sure, timing is everything in this business, but each made some excellent and timely choices around hedging, the development program and acquisitions that positioned them to be where they are.

But the best strategy must acknowledge two things. First, the rock is the rock and there isn't anything you can do about that (how many teams tried to convince themselves a larger frac would fix the problem?). And second, commodity prices, boy, they matter. Ask anyone that lived through PE purgatory for the last 5 years working natural gas, many were Smashco'd, only to discover those that survived at $5.50/mcf, are getting set to retire... but I digress.

As Tier 1 inventory depletes in the Eagleford and Bakken, Colorado regulatory risks remain elevated, and the Anadarko basin struggles with spacing perceptions and realities, the Permian basin is poised to be the only oil basin that matters (I know people don't like when I say that, especially when your company has assets in "the other basins", but I don't say things to make friends... I say them because they are defensible and true). What remains to be seen, is how the checker board comes together in the great consolidation.

With Conoco now owning Shell and Concho, Pioneer owning Double Point, Continental making a basin entry (which needs to be larger) with the Parsley/Jagged Peak Delaware assets out of Pioneer, Devon needing to follow up it's WPX acquisition, and EOG underscaled in the Permian relative to the size of the company, there are a lot of acquisition opportunities of scale that fit. But!! There is a cavern between public company valuations and private company valuation desires.

In 2018, the E&P PE model moved from "acquire and flip" to "drill your returns." PE companies could run 7 rigs, ramp up cash flow to try to get paid at 4x forward CF at peak production to hide the implied acreage cost in an acquisition. Felix did it perfectly. So did Double Point. But today, the challenge is that PDP sells at PV10 and PUDs at "PV25." Buyers need the PUDs to generate a sufficient return, and sellers want to sell all PDP to make their waterfalls.

How this gap will be bridged will be fascinating to watch in 2022, the early clues will come from what Adev, Colgate and Tap Rock do.

#hottakeoftheday

A much younger, thinner, less cynical me at our first well in 2017, 3 miles west of Ameredev and 2 1 mile south of Tap Rock. And people thought we were crazy…