Beyond the currently tumultuous financing markets and depressedcommodity prices there is a good deal of potential energy in themergers and acquisitions arena, according to Eric Mullins, vicepresident of Goldman Sachs.

Investors are hanging back because of uncertainty over Asia andLatin America as well as low commodity prices and politicaluncertainty in the White House. “So investors for the most part arejust stepping back and saying, ‘Whoa, I need some time. I need tounderstand what’s going on in these markets. So when that happens,part of what we’re seeing is the market has obviously beenextremely volatile,” Mullins said.

Volatile but not closed, he noted. Investors aren’t saying theywon’t invest. Instead, they’re telling Goldman Sachs they are goingto be “extremely selective” about what they invest in, “not only interms of companies but also in terms of sectors.” Exploration andproduction financing is tough to come by right now but not unheardof. “Some of the stronger credits are able to get debt financingdone. It is very difficult to get equity financing done right nowunless there’s a very compelling story.”

Mullins outlined two scenarios for energy sector mergers andacquisitions for attendees at Ernst & Young LLP’s ninth annualEnergy conference in Houston this week. “If commodity prices. staysoft or continue to go down for a prolonged period of time, we aregoing to see a number of companies really need to do a transactionbased on the fact that there’s going to be a liquidity crises atsome of these companies.”

On the other hand, if commodity prices come up a bit, it willbring some sellers into a market already flooded with potentialbuyers. “As soon as you start seeing some recovery you also startto see a number of the sellers come back into the market, thinkingthat, ‘OK, now my price has come back a bit. I couldn’t sell beforebecause my prices were too low.’ And the prices start to come back.You’ve got the buyers already in the market, and boom, there arethe sellers and you have a very, very active merger market.

“[T]here are quite a few folks who are talking and quite a fewconversations going on. There are some transactions getting doneright now.” Another prediction: look for more hostile transactionsaround the corner.

Apparently not looking for a merger partner but choosing to relyon alliance partners for financing is EEX Corp. Chief FinancialOfficer Rich Langdon said the company’s strategy is to focus on thedeep-water Gulf of Mexico where the prospects are good. Being anindependent, he conceded EEX doesn’t have anywhere near the accessto capital that say an Exxon enjoys. “Our balance sheet is notlarge enough to carry the full cost of multiple deep-waterdevelopments. Fortunately, there is a lot of opportunity out thereto raise capital, either through industry sources or through moreconventional financing sources. We will lean heavily on alliancepartners, many of which are currently in place, to provideassistance in this area,” Langdon said.

Langdon noted, though, that the universe of independent E&Pcompanies is ripe for some heavy merger activity with theinvestment bankers circling. “It makes us sit back and wonder ifwe’re really in the right business.”

Low commodity prices aren’t hurting EEX as badly as some mightthink, Langdon said. In fact, the low prices, which have taken someof the cost out of exploration and production are somewhat welcomedby the company. “To the extent [low prices] impact the coststructure of operating in the deep-water, that actually will helpus in the short-run to go through a cycle that depresses the coststructure.” Hopefully, in EEX’s view, prices will be back up againwhen its gulf prospects begin producing.

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