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Foreigners, Private Equity Said Eyeing Big U.S. Unconventional Deals

Foreign buyers up to now have been gaining intelligence about drilling in North America's prolific unconventional formations through joint ventures (JV) and region-specific acquisitions with willing U.S. natural gas and producers, but that's about to change, according to an energy expert with industry consultant PwC US.

Rick Roberge, who handles mergers and acquisitions (M&A) for PwC's energy practice, said some big transactions likely will be announced this year. It's not JVs that are being eyed, but rather, entire companies, he told NGI's Shale Daily.

"Up to now a lot of deals have been joint ventures...with independents, which was the most logical step, as it provided an entry in intelligence gathering," he said. "The next logical step is to own and operate and have control of the process and the capex [capital expenditures] and all that."

2011 "was all about the JV," said Roberge. "This year it will be all about major acquisitions."

Roberge noted that the international E&Ps "invested heavily in U.S. shale plays" last year "and we believe a trend to watch out for in 2012 is for foreign buyers to look to acquire entire companies that operate in shale plays so they can take more control of the assets through operatorship. We also saw major private equity firms making big bets in the energy industry in 2011 and we expect their activity may accelerate as favorable oil price outlooks provide an attractive investment rationale."

"As deals continue in 2012, corporates and private equity firms should consider focusing on maximizing the assets they acquire and ensuring they have the right deal strategies, integration plans, and controls in place to successfully navigate this evolving and complex landscape." Because of the nature of E&P transaction activity, information about specific transaction information wasn't available.

Several deals were consummated last year between foreign oil companies and domestic exploration and production (E&P) companies. However, there were only a few big takeovers by foreign buyers. The biggest announced transaction was by Australia's BHP Billiton, which paid an estimated $12 billion to buy unconventional producer Petrohawk Energy Corp. (see Shale Daily, July 18, 2011). In addition, Norway's Statoil ASA, which, like BHP already has several JVs in place with domestic E&Ps, gained entry into the Bakken Shale and Williston Basin through a $4.4 billion buy out in October of Brigham Exploration Co.

"I see a big share of purchases coming from foreign companies this year," said Roberge. In addition to foreign buyers, "private equity still is looking."

Private money was a relatively smaller player in the U.S. unconventional market last year but they are predicted to be "playing major roles" in the coming year. The biggest private equity transaction last year was in November by an investor group led by Kohlberg Kravis Roberts & Co. LP, which paid $7.2 billion for privately held onshore operator Samson Investment Co. (see Shale Daily, Nov. 28, 2011).

Oil and liquids plays are a higher priority because prices are higher than natural gas. Companies have a lot of reasons to still make gas deals, but it will be the biggest players that are most interested in buying companies with an eye on liquefied natural gas (LNG) exports from the United States, said Roberge. He is doubtful that there would be much LNG exported from the United States. A more likely venue for ample domestic supplies will be for transportation and petrochemical demand.

However, the Canadian energy M&A may see more foreign interest as players ready LNG export plans in British Columbia to carry gas to thirsty Asia Pacific markets, he aid.

As far as Canada exporting gas to the United States, "that's going to go away over time," said Roberge. "We've got all the gas we need in the U.S. So, I would say it's still a fairly new market [LNG exports] but I'm not sure if it would move beyond the U.S." because of the "price distance...

Canadian LNG exports "definitely will move to China. They are real interested."

PwC US recently completed a 4Q2011 and full-year 2011 analysis of U.S. energy M&A using transaction data from IHS Herold. The analysis focused on U.S. transactions valued at more than $50 million only.

"New drilling techniques in hydraulic fracturing are uncovering vast amounts of crude oil and natural gas in a very accessible environment to oil and gas reserves and this is what is contributing to the huge interest in shale plays," said Roberge. "The low price of natural gas, partially due to the increase in supply, has also driven a shift toward more oil and liquid plays as companies and investors look to take advantage of oil prices, which is holding steady at $100/bbl.

"We expect deal flow to remain active in 2012, despite continuing economic uncertainty, due to attractive commodity prices, which promotes exploration and development as well as upstream M&A activity."

Deal values increased throughout 2011 as producers shifted toward more oil and liquids-heavy investments and away from gassy formations.

According to PwC, 191 transactions accounted for $186.5 billion in activity last year, an increase from $138.5 billion in 2010. That was five more deals than were announced in 2010. Average transaction size also jumped last year to $977 million, which was 38% higher than the $706 million in 2010. The increase in size was driven by 32 "mega deals," which were valued at $1 billion or more.

Shale transactions in the U.S. upstream represented slightly more than half (51%) of total upstream deal values in 4Q2011. Eleven transactions together were valued at $12.3 billion. For the year, 55 shale-related deals in the upstream sector totaled $59.6 billion, or 81% of total upstream deal value. Four shale-related transactions totaling $3.5 billion announced in 4Q2011 involved the Marcellus Shale, while three Utica Shale deals had a total value of $3.6 billion. For the year, a total of 13 deals in the Marcellus Shale were worth $9.9 billion, compared with 22 deals that totaled $20.3 billion in 2010. The Utica Shale had seven transactions that represented $6.7 billion in 2011, versus one deal in 2010 that was valued at $178 million.

"The industry continued to make a paradigm shift to shale in 2011 with virtually every major oil and gas company taking a position in unconventional plays," said Steve Haffner, a Pittsburgh-based partner with PwC's energy practice. "Activity in the Marcellus Shale remained strong for patient buyers waiting out the supply-demand dynamics of natural gas.

"Toward the end of last year, we saw many investors looking at the Utica Shale as the next area of interest to take advantage of the more liquids-rich resource, and its proximity to major metropolitan areas. Companies are now focused on building the related infrastructure to transport the extracted oil and gas, which we believe will likely be a key driver of M&A activity in 2012."

Foreign buyers announced 10 transactions in 4Q2011 that were valued above $50 million, two fewer year/year. Total deal value, however, climbed in the final quarter to $13.9 billion from $9.4 billion. For the year there were 40 transactions by foreign buyers, five fewer than in 2010, but total deal value in 2011 jumped 55% to $56.4 billion. In addition, transactions sponsored by financial entities "increased dramatically" in 4Q2011 to $8.8 billion, versus $353 million in 4Q2010, when three deals were announced. For the year, 10 deals involved financial sponsors, one less than in 2010, but total value skyrocketed to $13.2 billion in 2011 from $3.1 billion in 2010.

In a separate report on M&A activity, Deloitte LLP said deal activity in the second half of 2011 was steady in many energy sectors.

"However, the value of the deals increased significantly, fueled by a few large transactions," said Deloitte's Gary Adams, vice chairman of U.S. Oil & Gas. "While firm oil prices are providing underlying support for an active deal market, the biggest driver of investment continues to be enabling technology events that have unlocked the potential of shale -- and the way those events are now changing the dynamics of many segments of the energy industry. Leveraging horizontal drilling and hydraulic fracturing technologies have helped to unlock shale reserves, which were previously uneconomical."

Like PwC, Deloitte expects to see more private equity deals this year.

"We are seeing more 'platform plays' by private equity firms where they build up a significant asset base in order to eventually exit via initial public offerings," said Deloitte's Jim Dillavou. Continued "sizable" transactions are expected by private equity. "Firms that have sold their stakes are now looking to re-enter the U.S. energy market. E&P, with lots of properties available, is an area where buyers can come back in quickly."

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