Soaring oil and gas activity has put the Permian Basin on the world’s radar.
“The amount of activity in terms of dollars chasing deals is incredible,” said Scott Sims, senior vice president at Allegiance Capital Corporation by phone from his Dallas office.
He cited one client with a foreign investor wanting to acquire acreage in the Permian Basin but can’t find any to acquire.
Producing acreage, he said, is scattered and extremely expensive. With more buyers than sellers in the market, he said that equilibrium is out of balance.
Sims acknowledged that his focus is more on service companies than exploration and production companies. Oilfield service companies are driven by a need to access capital and supported by their relationships with exploration and production operators, he said.
Sims said he has been advising service company owners that now is the opportune time to sell, especially with the amount of capital on the sidelines seeking energy-related investments.
“My firm belief is that, for the most part, at this time in their lives, now is the time to sell. If we haven’t peaked, we will reach that peak, and when we surpass that peak, they’ll lose money.”
It’s better to sell when you want to than if you have to, he added.
He said that oftentimes a large company like a Schlumberger or Baker Hughes will upgrade local facilities and retain the employees after buying a locally owned company and that many of these companies are struggling to find workers.
Those are the strategic buyers, he said.
If a business owner doesn’t want to completely sell their company, Sims said the owner could sell a stake, for example 75 percent, to a company, retaining the remaining 25 percent. That mitigates the risk in case activity collapses, he said, explaining that he has sold off 75 percent of the risk. At the same time, if activity continues to grow, the owner has 25 percent to capitalize on that growth.
Or the company has grown so large so quickly it has outgrown its local bank and needs to bring in a financial partner to fund continued growth, Sims said. Those are the financial partners, and Sims said he doesn’t’ think a lot of companies “appreciate that element of the business.”
Sims sees plenty of upside in the Permian Basin, given the high levels of activity and the basin’s stacked pay potential. He agreed with a recent Wood Mackenzie report that said the Midland Basin’s Wolfcamp Shale has been attracting increased interest and investment. The report said spending in the Wolfcamp, currently third behind the Eagle Ford and Bakken Shale, is expected to surpass $12 billion this year , about 80 percent of Bakken Shale expenditures. Wood Mackenzie analysts say spending in the Wolfcamp could exceed the Bakken as early as 2017.
While the Permian Basin is a mature basin, it has more infrastructure in place, with substantially more rigs at work, Sims said. That is why there is such significant investment in upgrading and expanding infrastructure, bringing in needed supplies like sands and proppants to fracture wells.
While the Permian Basin may be in an economic bubble, he said, “activity levels are fundamentally sound.”