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M&A Activity Driven By Growth, More Exploration

M&A Activity Driven By Growth, More Exploration

Should the energy industry expect more mergers and acquisitions? Eric Mullins, a former Houston Oiler football player and now managing director of Goldman Sachs, said he didn't have to go out on "much of a limb" to answer that question. "Maybe I'll just say 'yes' and sit down," he told attendees of Arthur Andersen's Energy Symposium in Houston last week..

But he didn't sit down, offering a generally positive forecast for M&A activity, along with Robert G. Phillips, president, El Paso Field Services, and Arthur L. Smith, CEO of John S. Herold Inc.

Focusing on the upstream sector, Mullins said that generally, the energy sector had ranked low in terms of M&A activity over the past decade. It also ranked very low in terms of hostile takeovers because "unless you start out friendly, it's difficult to determine what the other company has in terms of reserves."

Even taking out the "mega deals" such as mergers between BP and Amoco and Exxon and Mobil, Mullins said that the energy sector now was on a "terrific run" in M&A activity, driven by growth within the companies, more exploration activities and more raw acreage.

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

The downside to M&As: paying too much. "The biggest risks for 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 midstream industry, said strong fundamentals are driving all segments of the business. "You can't start talking about the natural gas industry without talking about drivers in gas demand. We're looking for the most significant increase in natural gas demand than we've ever seen in this industry in the next 10 years. Clearly, the growth associated is going to put pressure on supplies."

To meet that type of extraordinary demand, there will have to be a world class effort, he said. "Today, we're running a record number of rigs looking for gas and oil. El Paso Field Services will be spending a lot in North America."

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

"Uniquely, we're going to have a large exploration and production company after the Coastal merger," Phillips said, with MLPs playing a role. "It creates a huge financial advantage for us when acquiring assets."

Smith, of John S. Herold, said he also expected to see more M&A activity because companies "are constantly seeking to replace the assets each year. 'Do we buy or do we drill' is the question asked each year. If stocks don't move, they are gobbled up."

Smith said he expected to see the most activity in the United States 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 very sharply. This year, the big are getting bigger," he said, referring to 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 Alberta Energy Canada and McMurry Oil. "That trend will continue."

Carolyn Davis, Houston

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