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Private equity interest in South Texas' Eagle Ford continues with $2.7 billion oil, gas merger

Houston — A $2.7 billion merger backed by private equity interests that was announced Tuesday will build on oil and gas potential in the Eagle Ford at a time when some traditional players are cutting back in or exiting the South Texas play in favor of opportunities in the prolific Permian and Appalachian basins.

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The tie-up involving TPG Pace Energy Holdings and funds managed by EnerVest reflects efforts by producers and, by extension, the midstream operators that carry the resources to market to streamline their portfolios to focus on core assets.

Amid persistent commodity price volatility, some investors believe they can make relatively small investments and still generate sustainable returns in the Eagle Ford thanks to their large footprints. Others have been pushing independents and the majors to seize acreage in high-growth territories before entry becomes too costly.

"Assuming moderate commodity prices, we plan to invest less than 60% of cash flow to fund a drilling program that consistently delivers more than 10% annual production growth," Steve Chazen, a former Occidental Petroleum CEO who will lead the combined company formed by the merger, said in a statement.

Shifting strategies have been evident across the industry over the last two years.

Cabot Oil & Gas decided in December to shed its Eagle Ford assets to concentrate on the Northeast and new production areas. Carrizo Oil & Gas has also sold assets in the Eagle Ford. And Devon Energy, which has undergone a significant overhaul, has looked at selling assets there as well.

The players that have reduced their exposure to the Eagle Ford are moving more aggressively into the Permian, which spans West Texas and southeastern New Mexico, as well as the SCOOP and STACK in Oklahoma and the Marcellus and Utica shales in the Appalachian Basin in the Northeast. While the Permian is largely an oil play, significant amounts of associated gas are being lifted there, and producers are working with midstream companies on new infrastructure to move that gas to the Gulf Coast for use in exports and by the petrochemical industry. ExxonMobil is among the majors expanding in the Permian.

On the flip side, private equity money is pouring into the Eagle Ford, filling the gap left by the traditional producers that are leaving or scaling back there.

Rig activity in the Eagle Ford continues to support growing production in the basin over the next couple of years, data compiled by S&P Global Platts Analytics shows. Rig count in the basin has grown by 11 since this time last year; it currently stands at 86.

After bottoming out around April 2017, production in the basin has again been on the rise, supported by more favorable oil prices and efficiency gains in the market. Gas production has grown nearly 300 MMcf/d since the beginning of 2017, and Platts Analytics anticipates this growth to continue. The current forecast supports an incremental 123 MMcf/d of gas production by the end of 2018.

The investors involved in Tuesday's Eagle Ford deal cited some of those fundamentals in touting the potential they see there.

The transaction calls for TPG Pace Energy Holdings and certain funds managed by EnerVest to acquire the oil and gas assets within EnerVest's South Texas division. TPG Pace Energy is an energy-focused special purpose acquisition entity led by Chazen that was formed by private equity investment firm TPG. In turn, the new company will be called Magnolia Oil & Gas and will be led by Chazen, who will serve as Magnolia's chairman and CEO. EnerVest, a private equity firm that focuses on energy investments, will keep a sizable ownership stake in Magnolia.

Magnolia will consist of EnerVest's approximately 360,000 total net acres in South Texas and more than 40,000 boe/d of production. The deal, which is expected to close in the second quarter, is subject to approval by TPGE shareholders and other conditions. The new company will be publicly traded.

--Harry Weber and Liz McFarland,

--Edited by Gail Roberts,