Permian Basin - Oil & Gas Mergers, Acquisitions and Divestitures

Investment Banking Experts for the Energy and Industrial Sector

Securities offered through PetroGrowth Energy Advisors, LLC, member FINRA/SIPC.

Permian Basin - “Let’s Do A Deal”(M/A/D Trends)

2 Boutique Energy & Industrial Investment Bank for the Middle Market

Agenda

Introduction ……………………………………………………………………………………. I.

Permian Basin Activity is Highly Supportive for Deal Making……......... II.

Exploration & Production A&D Themes Oilfield Services and Equipment M&A Themes

Case Study ………………………………………………………………………………………. III.

Boutique Energy & Industrial Investment Bank for the Middle Market

3

Wilcox | Swartzwelder & Co. Overview

Knack for understanding our client’s situation, positioning the company to unlock value, creating a highly credible and compelling “story”, selling it to the right investors / buyers and negotiating a favorable outcome

We Help ClientsCreate Value

Bring Wall Street Expertise to Main Street

Industry and Transaction Experts

Principals’ Successful Track Record

Senior level commitment; “boutique” service; high quality advice and deal execution

Combine Wall Street background and training, Ivy League education, industry knowledge, middle market investment banking experience and hard work to get deals done

Deal size generally up to $150 million

Industry specialization offers advantages to clients (knowledge, research and relationships)

Access to and ongoing communication with industry buyers/investors/capital sources

Rigorous, proven transaction process that yields superior results

Broad experience working with many complex deal types and structures in good and difficult markets

Principals bring almost 40 years of experience, more than 100 closed transactions with value in excess of $3.8 billion

Team includes five others providing analytic and back-office support

Leading boutique investment bank providing financial advisory solutions exclusively to mid-market companies in the Energy sector.


Principals

Career 18 years investment banking Bear, Stearns & Co. Raymond James & Associates Growth Capital Partners

Education M.B.A. The Wharton School of U. of

Pennsylvania B.S. Economics, Texas A&M

University Econometrics, London School of

Economics

Jason Wilcox

Managing Director & Co-Founder

Grant Swartzwelder

Managing Director & Co-Founder

Career 20 years energy investment

banking/operations PetroGrowth Advisors The Principal Securities Ensco plc / Arco Oil & Gas

Education M.B.A. Harvard Business School B.S. Petroleum Engineering, Texas

A&M University


Advisory Services

Mergers & Acquisitions / Company Sales /

Divestitures

Oil & Gas Property Sales & Divestitures

Institutional Capital Raising / Private

Placements

Financial AdvisoryRefinancing /

Recapitalization / Buyout

Merchant Banking / Private Equity

Helping clients define objectives, evaluate options and work side-by-side as advisor navigating through the maze of transactional complexities – from start to finish.


Energy Industry Specialization Benefits Clients Specialization offers numerous advantages to clients – research, industry intelligence, capital markets knowledge, valuations, trends, investor and buyer relationships.

Oilfield Services & Equipment

Upstream Oil & Gas (E&P)

Midstream Pipelines, Gathering, Storage & Blending

Downstream Services & Equipment

Environmental

Building and Construction

Electrical & Power

Engineering and Infrastructure

Industrial Distribution

Industrial Technology

Process/Flow Controls

Specialty Chemicals

Water / Wastewater

Energy Industrial

• Navigated through multiple cycles, completing transactions in periods of positive momentum as well as extremely difficult circumstances


Extensive Experience With Strategic Buyers

7

Extensive experience marketing to and soliciting/negotiating with strategic players.

Energy Services Exploration & Production Industrial

Showed deals to over 155 unique energy services and equipment strategic buyers in 2012; have shown deals to over 500 unique strategic buyers of energy and industrial companies.

Ongoing communications with various strategics and track and monitor those groups which have completed M&As and submitted term sheets, bids, letters of intent and legal agreements for our deals; including deal terms, structures and valuation metrics.


Large Network of Institutional Capital RelationshipsStrong relationships with a large network of active institutional capital providers and investors focused on segments of the energy and industrial sector.

Showed deals to over 195 private equity groups in 2012; have shown deals to over 500 institutional private equity groups, senior and junior lenders, insurance companies, hedge funds and family offices focused on the middle market.

Maintain ongoing dialog with capital sources; provides real-time market feedback and accurate valuation guidance.

Track and monitor in our proprietary database those groups which have completed M&As in our target sector and submitted term sheets, bids, letters of intent and legal agreements for our deals; including deal terms, structures and valuation metrics.


Experience; Track Record - Example Transactions

Experience spans over 100 transactions with aggregate value in excess of $3.8 billion.

$20 Million Revolving Credit$45 Million Term Loan

$25 Million Second Lien Loan

Management Buyout of Certain Assets from

Nighthawk Oilfield Services

Recapitalization with Ancor Capital Partners

Formed NewCo to Acquire Certain Assets from Texas Maximum Production, L.P.

Company Sale to MRC Global (McJunkin Red Man

Corporation)

Financial Advisory to Evaluate Strategic AlternativesSenior Debt Financing

Two State Oilfield Inc.

Production Specialty Services

Senior Credit Facility

Company Sale to Basic Energy Services

Recapitalization with Silver Peak Partners and

Saybrook

Management Buyout and Recapitalization

Company Sale to Frac Tank Rentals, LLC,

Portfolio company of Lone Star Investment Advisors

Strategic M&A Buyside Advisory

Acquisition of Genesis Gas Gathering Assets Private Placement

What Does the Future Hold for Energy M/A/D Activity?


Difficulty of Predicting the Future

11


Difficulty of Predicting the Future (Oilfield Services Index – OSX)

12

Recession begins (April 2008)

Oil price reaches

$141.47/Bbl(June 27, 2008)

Oil price drops to $33.20/Bbl

(January 16, 2009)

European debt crisis

Recession ends (June 2009)

Governmentshutdown


How Good is Your Crystal Ball?

13

“How frustrating. The crystal ball is down again”Source: New Yorker – August 12, 1991

Permian Basin Activity Highly Supportive for Deal Making


Key Exploration & Production A&D Market Themes

Permian is one of the most coveted oil/liquids resource basins in U.S.

Valuations reflect the “Permian Premium”

Strong appetite from teams backed by private equity and small-cap public companies

Robust bidding for the “right” deal (with value given for upside)


Permian Basin Activity

Permian Basin Plays Permian Basin Activity (October 30, 2013)


Permian Basin – Highly Coveted

East Texas Basin

Delaware Basin

Bakken

Prudhoe Bay

Eagle Ford

Spraberry/Wolfcamp

0 10 20 30 40 50 60

Field/Reserve Size (Billion Boe)

Jan-10 Jul-11 Jan-13 Jul-14 Jan-16 Jul-170

400

800

1,200

1,600

2,000Permian Basin Production (MBoe/d)

Oil/liquids

Stacked pays

Mature infrastructure

Reserve potential

Expected production increase

Compelling rates of return relative to other basins

Characteristics of Permian Basin

Source: Bentek & Energy Information Administration


Producer Valuations Reflect “Permian Premium”

Permian Index: Diamondback Energy (FANG), Pioneer Natural Resources (PXD), Energen Group (EGN), Laredo Petroleum Holdings (LPI), Cimarex Energy (XEC), Concho Resources (CXO), Callon Petroleum Company (CPE) and Approach Resources, Inc. (AREX)

DJSOEP Index: Dow Jones U.S. Select Oil Exploration and Production (DJSOEP)

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%Permian Index vs. DJSOEP Index (Last 12 Months)

Permian Index DJSOEP Index


Public Markets Reflect “Permian Premium”

RRC

PXD

ATH

L

EQT

LPI

COG

CXO

FAN

G

ARE

X

CLR

REXX XE

C

EOG

CHK

NFX HES

WLL

DVN APA SM

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x10.6x

10.2x9.7x

9.2x8.6x 8.5x

7.6x7.2x

6.8x 6.6x 6.6x6.1x 6.0x 5.7x

4.7x 4.7x 4.4x 4.4x 4.4x 4.3x

Valuation for Public Market Producers

EV /

201

4E E

BITD

A Focused (8.5x)

Multi-Basin (4.7x)


Production Valuation Time Horizon

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 1050

100

200

300

400

500

600

$20,000 / Boepd

$50,000 / Boepd

$80,000 / Boepd $150,000 / Boepd$100,000 / Boepd

Net

Pro

ducti

on (B

oepd

)

Months

Public

High-risk, high-rate

Private Equity

Flattening decline

MLP

Low-decline, stable cash flow


Who is Buying Oil & Gas Deals?

International

International JV

Non-Traditional

Majors

MLPs/Trusts

Large Caps

Private Equity

Small Caps

$0.0 $5.0 $10.0 $15.0

$2.5

$4.5

$5.0

$5.1

$8.5

$10.8

$12.9

$13.2

U.S. Onshore demand over past 18 months.

Midland Basin Valuations

$15,000 - $20,000+ / Acre (Core)$10,000 - $15,000+ / Acre (Tier I)

Delaware Basin Valuations

$10,000 - $15,000+ / Acre (Core)$5,000 - $10,000+ / Acre (Tier I)

Permian Basin Valuations

$125,000 - $150,000 / Boepd6.0x – 8.0x FTM Cash Flow


Private Equity and MLP Appetite

Private Equity MLP$0

$10

$20

$30

$40

$50

$60

$70

$60.0

$34.0

E&P Focused Capital 50-60 teams backed by PEGs

hunting for platforms and ‘bolt-on’ acquisitions

Private Equity

Growth through acquisition

Operational platform capabilities to support rapid expansion

Distribution pressure

MLP’s


23

Assets > 30% Proved Developed Producing (PDP)

Production > 150 to 200 BPD

Predominantly oil / liquids

Not excessive well count

No well concentration > 25% of total production/reserve value

Repeatable, predictable results

Long life > 10 Years

Limited lease expiries near term

3rd party reserve report

Maps

Financials

Clean property title

What Makes for a “Good” Oil & Gas Property Sale?

Characteristics Informational Needs

Minerals

Working interests (operating & non-operating)

Royalties

Leases (more difficult)

Assets to Monetize


Key Oilfield Services & Equipment M&A Themes

Selective demand by private equity and strategic acquirers for “platform” and “bolt-on” acquisitions:

o Manufacturers of niche products in high demand

o Waning appetite for oilfield services

Reasonable valuations

Seller motivations

Multiple bidders for deals


25

Positive Expectations Built into Oilfield Stock Prices

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300 OSX - Oil Services Index Capital Expenditures – U.S.

2012 - $85 billion 2013 - $100 billion2014 - $115 billion2015 - $125 billion

Source: IHS, America’s New Energy Future, Sep 2013

Capital Expenditures – Permian Basin

2012 - $14 billion2013 - $15 billion2014 - $18 billion2015 - $20 billion

Source: Wood Mackenzie


26

Permian is Going Horizontal – Higher Service Intensity

Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 -

50

100

150

200

250

300

350

400 Permian Basin Horizontal vs. Vertical Rig Count

Horizontal Vertical


Who is Buying OFS Deals?

WS&Co M&A Database: 98 transactions

o 50 companies were purchased by strategic buyers (51%)

o 31 companies completed a majority recapitalization with a private equity group as a “platform” investment (32%)

o 17 companies were purchased by a strategic buyer backed by a private equity group (17%)

Approximately 50% were purchased by strategic buyers and 50% were purchased by private equity groups (or private equity backed companies).

On average there are 10-11 transactions completed each month; however, the pace of transactions has accelerated significantly since Q1'13.

U.S. Oilfield Services and Equipment M&A Activity (1/1/13 – 9/30/13).


Age (50 – 70)

Need for assistance (capital, talent resources) to manage high growth business

Strong financial performance/good time for exit

Tired; ready to devote time to other things

No succession plan

Competitive threats

Factors Influencing Owners’ Decision to SellSince 2009/10, many owners have created significant value; now time to “de-risk” personal wealth


29

Manufacturer of niche product / value-added service provider

EBITDA > $5 million

Customer concentration < 25%

Operating history > 5 years

Growth

Experienced management team; solid accounting/administrative systems

No legal, environmental, tax, regulatory or HR issues

Niche Manufacturing

o 4.0x – 6.0x

Value Added Oilfield Services

o 3.5x – 4.5x

Commodity Oilfield Services

o 2.5x – 3.5x

What Makes for a “Good” OFS Deal?

Characteristics Valuation Multiples (EBITDA)


Who Is the Best Buyer?...the Buyer that Meets Your Goals

Strategic (Corporate) Buyer

“Buy vs. Build” strategic analysiso Synergies

100% purchase (with structure)o Seller noteo Earn-outo Buyer stock

Continuation as employee (“Or Not”)

Other Considerations

Clarify your goals in advance A suitor is not necessarily a qualified buyer Competitors are rarely the best buyer Difficult to predict whether a strategic or financial buyer will pay the most

Financial Buyer

“Rate of Return” analysis

Typically a majority purchase; partial liquidity to seller with continued minority ownership

Desire to continue as owner with a financial partner

Corporate governance

Future growth; ultimate exit (3-7 yrs.)

Case Study


Puts pressure on buyers to offer their best deal (eliminates “tire-kickers”)

Creates alternatives; allows seller to simultaneously evaluate multiple offers and determine “best” deal

Allows seller to pick a buyer that meets his goals

Seller maintains negotiating leverage and a position of strength

Broad “market test” ensures achieving the highest market clearing price

How Can a Seller Achieve Maximum Price/”Best” Deal?

Create a competitive market among multiple, qualified buyers.


Case Study: Middle Market Oilfield Service Transaction

A B C D E F G H I J K $-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

$100.0

$90.0

$82.5 $80.0 $80.0 $79.7 $75.0

$65.0 $65.0 $61.1 $60.0

$50.0

Since “beauty is in eye of beholder”; it pays to broadly test the market $40 million difference between initial high and low bids

Initial Indications of Interest ($mm)

Financial SponsorStrategic Buyer


Thank You!

102 Decker Court, Suite 204Irving, Texas 75062

972-831-1300

Jason Wilcox: [email protected] Swartzwelder: [email protected]

Website: ws-ibank.com

Date post:	13-Jan-2015
Category:	Economy & Finance
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Permian Basin - Oil & Gas Mergers, Acquisitions and Divestitures

Economy & Finance