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Deloitte: Cheap Gas Puts Some Companies in Play

Low natural gas prices have created a buying opportunity among dry gas-directed companies for larger players whose pockets are lined with oil dollars, according to consultancy Deloitte. And in the midstream, mergers and acquisitions (M&A) will be propelled by a consolidation trend among master limited partnerships (MLP), according to a midyear report on M&A activity.

Smaller companies with mostly dry gas assets will come under pressure, Deloitte said. "A prolonged period of high oil prices has left the super majors and national oil companies with ample cash to fund buying opportunities. We believe that because of this dynamic, lower natural gas prices may drive a stronger domestic mergers and acquisitions market in the months ahead."

After a rush of activity during the second half of last year, the first six months of this year saw a decline, Deloitte said. During the first six months of this year total industry deal count declined to 231 transactions from 256 in the first half of 2011. Total deal value fell slightly from $108.6 billion during the first half of 2011 to $106 billion during the first half of this year.

The "severe and prolonged weakness in U.S. natural gas prices" has started to change the dynamics of the deal market for companies heavily involved in natural gas, said Deloitte's Jason Spann, a partner in the tax practice. "Certain oilfield service companies and pure-play natural gas E&P [exploration and production] companies are particularly affected," he said. "We are seeing some companies challenged by low prices, causing them to pull back their activity."

Said Deloitte's Jed Shreve of the financial advisory service business, "Low natural gas prices will likely put pressure on pure natural gas players as hedges roll off and some companies cannot meet drilling commitments to hold acreage. That may force some restructuring."

With gas prices so low that some people feel they are "out of line," it makes it difficult for potential transaction partners to close a deal, said Deloitte's Jim Dillavou, who is with the firm's energy M&A transaction services business. "That may permeate beyond natural gas E&P companies to the midstream and oilfield service businesses as well because of concerns about a slowdown in domestic drilling activity," he said.

In the midstream sector, the field is set for consolidation, according to Shreve. Energy Transfer Partners LP's $9 billion deal to acquire Sunoco was the largest deal announced during the first half of the year (see NGI, May 7), and a number of smaller midstream deals took place as well, Deloitte noted. Total deal value reached $29.3 billion, up sharply from $17.2 billion during the first half of 2011. The Energy Transfer-Sunoco deal and the Kinder Morgan-El Paso tie-up before it (see NGI, Oct. 24, 2011), as well as other large deals, could spur more activity in the future as some assets are divested and mergers occur for strategic or regulatory reasons, Deloitte said.

Shreve said he expects more activity in the midstream sector as publicly held MLPs are beginning to consolidate. "We have seen corporate E&P companies selling assets to MLPs, and that will likely continue as MLPs consolidate assets from private joint venture vehicles and major integrated companies."

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