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 past year.

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. independents.

"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 go-scientists."

Said Morris and Schmitz," "It will be interesting to see how many other independents eventually end up on the same path as Barrett currently."

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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