Gas-Rich Independents More Attractive to Buyers
Analysts covering the attempted takeover of Barrett Resources by
Royal Dutch Shell Group said last week they expect to see
additional consolidation of U.S. independents with a heavy gas
portfolio, especially now that the majors and larger independents
are flush with cash from through-the-roof commodity pricing in the
On average, E&P shares jumped more than 9% last week, and
companies that made the "greatest leap" were companies with a
strong natural gas presence in the Rocky Mountains, as well as the
gas-rich companies in the mid-continent and Gulf Coast regions.
SSB analysts Robert Morris and Michael Schmitz said that while
they did not expect a "sudden wave of consolidation," the signals
point to higher stakes "longer term" for most of the U.S.
"Nearly our entire coverage group is generating excess cash flow
with debt-to-book capitalization ratios, on average, projected to
end the year at 35% or perhaps even lower given the current outlook
for commodity prices," they said.
The SSB analysts said that "in an environment where the
independents are struggling to organically' grow overall domestic
production by even 5%, on average, this year, many are already
eyeing their peers as a way to significantly expand reserves and
production. We would also emphasize that not only are many
independents looking for opportunities to expand reserves and
production, but they are also seeking situations that can augment
their technical talent given the shortage of experienced
Said Morris and Schmitz," "It will be interesting to see how
many other independents eventually end up on the same path as
Dain Rauscher Wessels analyst Ray Deacon said he expects the
move toward consolidation to continue in the months to come among
U.S. independents - a trend that until now has been eschewed by
majors in favor of foreign and deepwater energy prospects.
"There's going to be a big gap in growth for the majors in the
next two years," Deacon said. "The independents like Tom Brown and
Evergreen have good acreage, and have had great success. The majors
have all of this cash flow and they will be looking to buy in the
next two years."
Deacon said that the U.S. electricity market is growing and will
continue to grow, and the larger companies realize the natural gas
market will grow with it. "The only negative I've heard is that the
majors now think they should have considered these buys a year and
a half ago. Most of the majors don't have a U.S. gas presence, but
they want one now."
Carolyn Davis, Houston
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