Resource Plays Require New Capital Strategies
By Daniel C. Herz
PITTSBURGH, PA.–On the last day of April, Atlas Resource Partners L.P. closed a $190 million acquisition of a large position in the Barnett Shale play from Carrizo Oil & Gas. This transaction was the sixth in a series of major transactions, including asset sales, joint ventures, and corporate transactions and restructurings within a span of four years that totaled nearly $7.5 billion and placed Atlas in the midst of the fray to develop major unconventional resources.
The Barnett Shale deal with Carrizo certainly will not be the last for Atlas Resource Partners. In fact, since announcing that acquisition on March 16, the company entered into a definitive agreement for a joint venture with Equal Energy Ltd. in the oil-rich Mississippi Lime play in Oklahoma in early April, and then in in mid-May, announced it had agreed to another acquisition, this time a $184 million deal with Titan Operating LLC for 250 billion feet equivalent of proved reserves and associated assets in the Barnett Shale.
Each of these deals demonstrates the company’s continuing ability to provide strong value to its unitholders through accretive transactions, and underscores the evolving nature of the domestic exploration and production business in the new era of unconventional resource plays. The past decade’s progress in technology and understanding of unconventional onshore oil and gas development is the industry’s most recent triumph in its long evolution. But technology and understanding are inadequate without the massive and sustained amount of capital needed to apply them.
With the United States’ conventional production in decline, capital left these shores more than 30 years ago to focus on giant oil and gas fields abroad, in the deep sea and in the Arctic. Now, however, the United States, and specifically Appalachia, which saw the birth of the oil and gas industry with Colonel Drake’s well in 1858, is the place of energy’s latest renaissance. The Marcellus Shale in Appalachia is the largest natural gas field in the United States (and possibly the world). The tremendous opportunity in front of the United States to develop its Appalachian and other unconventional assets can be seized with a combination of continued technological advancements and sustained access to large amounts of capital.
New forms of financing have evolved to support the relatively new world of shale development, and Atlas has used them all–from major joint ventures to develop its minerals and pipelines, to corporate restructurings and sales, and finally, recognizing that other operating companies are in need of capital, to an exploration and production master limited partnership to acquire long-lived production from companies looking to redeploy the sales proceeds into unconventional development.
Marcellus Joint Ventures
Atlas, through its predecessor companies, has operated in Appalachia since the 1960s, and today operates more than 8,500 natural gas and oil wells. In early 2006, Atlas and other Appalachian companies recognized that horizontal drilling and hydraulic fracturing were applicable beyond the Barnett Shale, and possibly, to the Marcellus Shale in Pennsylvania.
Atlas’s geologists and engineers worked feverishly to determine the potential of this organically rich rock located between 7,000 and 8,500 feet below the surface, and underneath almost all of Atlas’s 85,000 acres. After the effort to evaluate the potential yielded early good results, Atlas immediately began securing a major lease position, which ultimately reached 1 million acres, including 340,000 net acres located in the core of southwestern Pennsylvania.
In 2009, Atlas and other companies involved in developing the shale plays realized that investing in energy in the United States had changed. The need for the continued application of large amounts of capital over several years to develop the full potential of the enormous land positions that mostly independent exploration and production companies had amassed determined that investment in onshore oil and gas would no longer be individual operating and pipeline companies working to maximize their own potential, but domestic competitors, foreign industrial conglomerates, international super majors, and global investment firms coming together to work cooperatively to develop America’s resources.
Atlas began this effort through its publicly traded master limited partnership, Atlas Pipeline Partners L.P., and its joint venture with The Williams Companies. The Williams Companies and its subsidiary, also a master limited partnership, partnered to develop the pipeline infrastructure necessary to transport the natural gas being developed by Atlas Energy to interstate pipelines. Atlas Pipeline and Williams, although competitors, would work together to build the billions of dollars of pipeline necessary to transport the trillions of cubic feet of natural gas that are expected to be produced from this region. This partnership exemplified the potential to do more though a partnership, with less risk, than could be done separately.
With the capital and a joint venture to construct a massive infrastructure project in place, Atlas Energy shifted its effort to finding a partner to develop its oil and gas reserves in the Marcellus Shale in southwestern Pennsylvania. As this process began in early 2010, the changing landscape was now clear within the domestic energy market.
The onshore United States was now home to the largest unconventional fields in the world. The world’s largest oil and gas companies had determined previously to move away from onshore development, and they needed a way to shift their focus and capability to developing these onshore U.S. resources quickly. Furthermore, companies and countries around the world were becoming interested in learning shale technology and determining whether it was transferrable to their homelands.
This dynamic created a symbiotic relationship. Independent exploration and production companies desired capital, and major and international oil and gas companies needed to reinvigorate their ability to develop onshore gas, which was a very different skill set then most had recently been accustomed to.
For Atlas, partnering to develop the Marcellus Shale required substantial thought and consideration. Since the Marcellus assets represented a major portion of the company, any misstep could permanently hinder the value of the company. The billions of dollars that would be required to develop Atlas’s position and the major capital commitments needed for associated pipeline takeaway, rigs and completion crews, as well as the potential risk of declining commodity prices, all led Atlas to decide to seek a partner. As Atlas had witnessed with Williams, if done correctly, a joint venture can drive value forward and share risk among parties.
In May 2010, Atlas partnered with Reliance Industries, which at the time was the largest publicly traded company in India, to accelerate the development of the southwestern portion of the Marcellus Shale in Pennsylvania. Reliance paid more than $1.7 billion, or $14,100 an acre, to partner with Atlas. In many ways, this transaction was similar to a wave of other joint venture transactions sweeping across the country, allowing companies such as Reliance access to advanced technology, substantial interests in large acreage positions, and staffs of personnel capable of developing the resource. Reliance, and other similar companies, used these joint ventures as springboards to develop their own technological abilities.
Multibillion Dollar Deal
Within several months following the closing of the Reliance joint venture, Atlas was approached by Chevron Corporation, which expressed its desire to acquire Atlas Energy’s remaining Marcellus Shale position and the staff developing the resource. To be able to develop an onshore resource such as the Marcellus, many majors desired the benefit of an existing staff, coupled with a world-class resource. Atlas had both. Through a series of complex corporate transactions, the “old Atlas,” which was in essence the Marcellus Shale, was sold to Chevron for approximately $4.5 billion, and the “new Atlas” began.
Because of the substantial discoveries of natural gas, the advancements in drilling and completion technology, and the large number of joint ventures drilling for dry gas, natural gas prices have tumbled. In November 2010 when Atlas announced the sale of the “old Atlas” to Chevron, the forward 12-month price for natural gas was nearly two times today’s spot price. The substantial drop in gas prices has further driven the need to find a partner.
Companies that had been focused on natural gas are now facing shrinking cash flows and reduced amounts of capital available under their lines of credit, constraining their ability to develop new oil or liquids-rich resources, which are expected to generate a high rate of return on investment at today’s oil prices. Today, Atlas is uniquely positioned to partner with others in developing the United States’ resource potential.
Upstream, Midstream MLPs
Atlas Energy now operates through its master limited partnerships (MLPs): Atlas Resource Partners L.P. (ARP), its exploration and production MLP, and Atlas Pipeline Partners L.P. (APL), its midstream MLP.
ARP operates more than 8,500 oil and gas wells focused primarily in Pennsylvania, Ohio and the Barnett Shale. In creating ARP, which began trading publicly in March 2012,Atlas realized the benefit of having a publicly traded exploration and production MLP to acquire long-lived production and generate stable, growing cash flow, ultimately to be distributed to unitholders.
Within the first two days of ARP’s trading publicly, it signed its first agreement to purchase 277 billion cubic feet of proved reserves in the Barnett Shale from Carrizo Oil & Gas for $190 million. This transaction allows ARP to benefit from buying long-lived reserves at historically low prices and gives Carrizo the ability to redeploy capital to other areas of higher priority.
Two short weeks later, ARP entered into the joint venture in the Mississippi Limestone of Oklahoma with Equal Energy to develop approximately 15,000 acres. This time, ARP was on the acquiring side of the joint venture, and the technical experience of Atlas is leading the drilling and completion efforts for the joint venture. In this example, the partnership allowed Equal to benefit from Atlas’s technical experience and capital, and ARP to benefit from Equal’s consolidated acreage position in the core of the Mississippi Limestone play in Oklahoma.
Most recently, on May 17th, ARP announced the acquisition of an additional 250 Bcfe of proved reserves in the Barnett Shale through the purchase of Titan Operating LLC.
Atlas Pipeline Partners provides midstream services in three of the most attractive resource regions in the United States. APL operates more than 500 million cubic feet a day of processing capacity, with projects that double that capacity over the next six months to about 1 billion cubic feet a day. Atlas Pipeline operates major facilities in the Mississippi Limestone in Oklahoma and Kansas, the wet gas portion of the Woodford Shale in Oklahoma, and the Wolfberry and Spraberry plays in the Permian Basin of Texas.
Atlas Pipeline is providing gathering, processing and transportation services to companies ranging in size from small independents to the largest integrated oil and gas companies in the world. Each year, there will not only be billions of dollars spent developing the minerals trapped beneath the United States, but there will be billions of dollars spent developing the midstream infrastructure necessary to transport the natural resources.
The opportunity to develop the resources the United States holds is one we cannot pass up. The success of the domestic energy industry will yield continued job creation, reduced dependence on foreign oil, and improved balance of trade. In trying to advance this opportunity, Atlas has navigated a changing environment–one where natural gas prices have fallen, major oil companies have re-entered areas they had long since abandoned, companies from around the world have come to seek a better understanding of the technology we have developed, and the world’s economic circumstances have been ever shifting. Atlas has found it a very productive time to work with other energy companies to ensure success both for Atlas’s shareholders and for our country.
Daniel C. Herz has been senior vice president of corporate development and strategy of Atlas Energy, LP since February 2011. He was senior vice president of Atlas Pipeline Holdings, LP (now Atlas Energy, LP) from August 2007 through February 2011. Herz has been senior vice president of corporate development of Atlas Pipeline Partners, LP since August 2007. He also was senior vice president of corporate development of Atlas Energy Inc. and Atlas Energy Resources, LLC from August 2007 until February 2011. Prior to that, he was vice president of corporate development of Atlas Energy Inc. and Atlas Pipeline Partners, LP from December 2004 until August 2007, and of Atlas Pipeline Holdings, LP from January 2006 through August 2007. Before joining the Atlas companies, Herz was an investment banker with Bank of America Securities.