Should the energy industry expect more mergers and acquisitions?Eric Mullins, a former Houston Oiler football player and nowmanaging director of Goldman Sachs, said he didn’t have to go outon “much of a limb” to answer that question. “Maybe I’ll just say’yes’ and sit down,” he told attendees of Arthur Andersen’s EnergySymposium in Houston last week..

But he didn’t sit down, offering a generally positive forecastfor M&A activity, along with Robert G. Phillips, president, ElPaso Field Services, and Arthur L. Smith, CEO of John S. HeroldInc.

Focusing on the upstream sector, Mullins said that generally,the energy sector had ranked low in terms of M&A activity overthe past decade. It also ranked very low in terms of hostiletakeovers because “unless you start out friendly, it’s difficult todetermine what the other company has in terms of reserves.”

Even taking out the “mega deals” such as mergers between BP andAmoco and Exxon and Mobil, Mullins said that the energy sector nowwas on a “terrific run” in M&A activity, driven by growthwithin the companies, more exploration activities and more rawacreage.

M&A activity also has led to more dividends for shareholders— but usually only in the larger mergers. “Independents aremaintaining capital and not offering returns so they can put itback in the ground.” He also said “ripe opportunities” still exist,with more acquisitions completed with stock transfers. “More stockis being used because the transactions are getting bigger, andthere also is less risk using stock than using cash.”

The downside to M&As: paying too much. “The biggest risksfor shareholders in M&A is in overpayment,” Mullins said.”While the overall market demands growth and earnings increases,sometimes companies that get in trouble try to buy their way out.They want to win too badly and overpay.”

El Paso Field Services’ Phillips, who focused on the midstreamindustry, said strong fundamentals are driving all segments of thebusiness. “You can’t start talking about the natural gas industrywithout talking about drivers in gas demand. We’re looking for themost significant increase in natural gas demand than we’ve everseen in this industry in the next 10 years. Clearly, the growthassociated is going to put pressure on supplies.”

To meet that type of extraordinary demand, there will have to bea world class effort, he said. “Today, we’re running a recordnumber of rigs looking for gas and oil. El Paso Field Services willbe spending a lot in North America.”

Because everyone will be looking for more gas, Phillips saidacquisitions would play a major role, with more companies usingMaster Limited Partnerships (MLPs) to finance the deals.

“Uniquely, we’re going to have a large exploration andproduction company after the Coastal merger,” Phillips said, withMLPs playing a role. “It creates a huge financial advantage for uswhen acquiring assets.”

Smith, of John S. Herold, said he also expected to see moreM&A activity because companies “are constantly seeking toreplace the assets each year. ‘Do we buy or do we drill’ is thequestion asked each year. If stocks don’t move, they are gobbledup.”

Smith said he expected to see the most activity in the UnitedStates and in Canada, with more activity within the independents.”The U.S. and Canadian values are almost in perfect lockstep now.What we see right now is a market where values are moving up verysharply. This year, the big are getting bigger,” he said, referringto M&A activity within Anadarko, Apache and Santa Fe Snyder.

Smith also said to keep an eye on Canadian acquisitions.

“Canadians are starting to move south of the 49th parallel,”said Smith, referring to recent acquisitions in Wyoming by AlbertaEnergy Canada and McMurry Oil. “That trend will continue.”

Carolyn Davis, Houston

©Copyright 2000 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.