What I saw at NAPE 2018

Last week the country's oil industry gathered in Houston for its largest and most non-technical "conference": the North American Prospect Expo. It is better known as NAPE, though, perhaps because it is so much more than prospects.

Since its lacks a technical program, my purpose in going is to see people and to take the pulse of the industry. The conversations as much or more than the posters exhibit what people are thinking and what they are working on. Most years, a unified mosaic emerges from the little pieces of the industry in each booth.

With the increase of price on top of last year's improved mood, I rather expected excitement, and the swag indeed reflected more enthusiasm. (Thank you, Apache, for the shot glasses.) (Seriously. Shot glasses.) But mostly the mood felt much more like restraint. Though we are experiencing the highest prices in years, no one even mentioned price. With industry participants still often running cash flows at $50 or $55 /bbl and hedging on the increase, producers don't seem to trust the current prices.

Last year, despite the drilling focus on the Permian, there were fewer offerings in the basin at NAPE. The San Andres residual oil zone made a surprise debut, and a diverse mix of established plays, interestingly including a strong showing of Gulf Coast and so-called "conventional" plays, filled out the menu.

As observed at NAPE 2017 and anticipated last spring, the trend in sales and in offerings continued to diversify away from the Permian and away from shale plays in general. This year, the San Andres ROZ was absent, and the only novel shale offering was the "Marfa high" prospect for Barnett and Woodford on the south side of the Diablo platform in the Delaware basin. Mostly the prospects were higher permeability plays and smaller targets. There was the usual, if shorter, parade of "30 TCF" or "10,000,000 bbl" headlines for seismic prospects in places like the Gulf Coast, but also a large number of more modest and off-beat deals. For example, I saw two in the Hardemann basin and others in the Penn sands of north central Texas and even a couple in south Florida, all well off the industry's beaten path for decades. And any of the offerings were listed as less morsels than 200 acres.

The most common offering this year, though, was nothing. That is, it mostly seemed like people were NOT offering opportunities for sale but only showing their faces and map of the assets they are keeping. Most companies were still working on what they had acquired in years past. The couple of larger sales discussed mostly seemed driven by the timing and wishes of the private equity backers and not by the timing of the market nor the wishes of management. The program lists about 230 "prospects", including some vague and informational listings, shown in over 600 booths. If we assume an average of two prospects per seller, then fewer than one in five booths contained prospects.

On the other side, it was not clear that many folks were buying. It seemed that appetites were satisfied, that buyers were still digesting previous purchases.

Both trends comport with PwC's analysis of deal activity last year. While the year started strong, it ended weakly with deal volume about flat and average value down 42% year-over-year. They interpret the current focus to be on "right-sizing" portfolios.

“Dealmakers entered 2017 with reawakened animal spirits and aggressiveness towards deals, including liquidity events such as IPO's. As the year progressed, these animal spirits were reigned in by extreme focus: on core assets, on capital discipline and on expected returns.” - Doug Meier, PwC

PwC also noted two other potentially impactful dynamics. They observe that the concentration of private equity deals increased to its highest mark in five years. What I really want to know is how those deals are faring on average. Are they buying or selling? Getting larger or smaller? (Please comment below if you have any insight.)

Next they note that the tax reform of 2017 could decrease foreign investment. For US companies, some changes could promote investment, but reduced deductibility of debt interest, which has been the funding of choice in 2017, could cut the other way.

From an outside view, there is one other dynamic which may be ripe. Every resource play, except for the Permian, has already gone through a boom and bust. From the Austin Chalk play of the early 1990s to the Eagle Ford and Bakken of the last few years, every resource play has expanded too far with prices too high and then contracted with a drop in valuations. It seems to be that some kind of contraction or bust is inevitable in the Delaware and Midland basins, but timing the short is another matter.

The slowing, slimming and diversifying of deals over a period of stable to increasing prices and the absence of emerging shale plays point toward the possibility of an interesting 2018.

Please share your observations or insights below. And you can read a couple of other views of the show here and here.

And it was good to see you at NAPE, Jim, Brian, Nic, Hunter, Philip, Casey, Eric, Hakim, Justin, Bill, Luke, Robert, Joe, John, Bryan, Rebecca, Caroline, Liz, Ashley, Jamie, David, Bob, Alex, Dean, Jill, Brandon, Gary, David, Ipher, Josh, Mark, Dave, Kyle, Michael, Rachael, Jim, Dan, Henri, Brad, Doug, Lee, Lyndon, Tim, Chris, Alex, Brent, David, Bob and Craig.