2020 has been surprising, to say the least.  From the wild fires in Australia to a contested election in the United States, we’ve seen a little bit of everything.  Who knew that investors could even rotate out of growth tech into value, as we saw in a huge way on Monday, with the super majors up 15%?!  As someone who was, and is, short the sector, days like Monday undo a huge amount of gains from an investment thesis in one tough day (and felt a bit like March 9), but I love this industry and the people in it, so I am happy when higher stock prices allow companies more flexibility to do what they must.  As we saw in another beaten down sector, Carnival Cruises and American Airlines both went to the equity market on the heels of their own big moves and shored up their balance sheet.  To the extent it’s possible, I would love to see the E&Ps do the same.  We have talked for years that the biggest risk remains debt, and debt isn’t going anywhere, so if one could raise equity to reduce debt and extend the runway for a more constructive price environment, that would be top on my list.

Nonetheless, I don’t run the companies, I just provide helpful suggestions from the peanut gallery, so it wasn’t lost on me that on #MergerMonday, two Colorado SmallCos decided they were better together.  Bonanza Creek entered into an arrangement where it will acquire HighPoint Resources for $376 mm, including debt.  What’s most “interesting” about this deal is that HighPoint has agreed to commence a simultaneous prepackaged bankruptcy alongside the registered exchange offer.  Effectively, if Bonanza Creek doesn’t get 97.5% of aggregate outstanding principal participation, HighPoint will be pushed into the Bankruptcy process, and as creditors are learning from events like Lilis (who borrowed $50 mm in DIP financing and barely covered that in the announced sale of the company this week), it may be better to get equity while the getting’s good, because there is a chance many creditors won’t seen their money again.

As always, synergies and “leading producer” and “enhanced size and scale” are the buzz words thrown around, which really can be broken down into head count and management team reduction, but it’s important and necessary.  In this case, a lot of value ($150 mm of PV10 value) is expected to accrete to the new entity, and the combination of assets, balance sheets and operating scale can increases the survivability of companies through these “volatile and unprecedented” times.  206,000 rural Weld County acres are attractive, and even with changes in local and federal governments, both companies were already massively “pregnant” with Colorado risk so the move made a lot of sense.  I expect to see these in the Permian, Bakken and Powder as we head towards year end because the YE SEC and spring borrowing base redeterminations are going to be UGLY (as of right now, I expect SEC prices to be $40/bbl and $1.95/mcf).

As for the rest of the world of oil and gas, investors (pronounced speculators) moved from heavily concerned about oil demand and super bullish natural gas last week, to incredibly bullish and constructive on oil and super bearish on gas, as the rotation from tech to value occurs.  As I have said, and maintain, even at $55/bbl, most of these companies are massively overvalued, and oil is still just $41/bbl.  It would seem to me that relying on a vaccine 6 months away to change consumer trends with more than 500 mm barrels of oil still in inventory and 7 mmbo/d of OPEC+ production sidelined falls under the category of “hope as a plan”.  I don’t see the bull case for these companies yet… but continued mergers and maybe some equity raises on the back of stronger commodity and equity prices might be just what the doctor ordered for a more constructive 2021.