Analysts covering the attempted takeover of Barrett Resources byRoyal Dutch Shell Group said last week they expect to seeadditional consolidation of U.S. independents with a heavy gasportfolio, especially now that the majors and larger independentsare flush with cash from through-the-roof commodity pricing in thepast year.
On average, E&P shares jumped more than 9% last week, andcompanies that made the “greatest leap” were companies with astrong natural gas presence in the Rocky Mountains, as well as thegas-rich companies in the mid-continent and Gulf Coast regions.
SSB analysts Robert Morris and Michael Schmitz said that whilethey did not expect a “sudden wave of consolidation,” the signalspoint to higher stakes “longer term” for most of the U.S.independents.
“Nearly our entire coverage group is generating excess cash flowwith debt-to-book capitalization ratios, on average, projected toend the year at 35% or perhaps even lower given the current outlookfor commodity prices,” they said.
The SSB analysts said that “in an environment where theindependents are struggling to organically’ grow overall domesticproduction by even 5%, on average, this year, many are alreadyeyeing their peers as a way to significantly expand reserves andproduction. We would also emphasize that not only are manyindependents looking for opportunities to expand reserves andproduction, but they are also seeking situations that can augmenttheir technical talent given the shortage of experiencedgo-scientists.”
Said Morris and Schmitz,” “It will be interesting to see howmany other independents eventually end up on the same path asBarrett currently.”
Dain Rauscher Wessels analyst Ray Deacon said he expects themove toward consolidation to continue in the months to come amongU.S. independents – a trend that until now has been eschewed bymajors in favor of foreign and deepwater energy prospects.
“There’s going to be a big gap in growth for the majors in thenext two years,” Deacon said. “The independents like Tom Brown andEvergreen have good acreage, and have had great success. The majorshave all of this cash flow and they will be looking to buy in thenext two years.”
Deacon said that the U.S. electricity market is growing and willcontinue to grow, and the larger companies realize the natural gasmarket will grow with it. “The only negative I’ve heard is that themajors now think they should have considered these buys a year anda half ago. Most of the majors don’t have a U.S. gas presence, butthey want one now.”
Carolyn Davis, Houston
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