The expectation for continued strong oil and natural gas prices, as expressed in each commodity’s Nymex strip, has had both positive and negative impacts on the exploration and production sector. It has allowed the industry to substantially pay-down of debt, but also has driven up costs for people, equipment and, in particular, assets.
“Regardless what segment of the industry you are [major, large cap, mid cap, small cap] the industry’s done a really good job, basically, of paying down debt,” said Adrian Goodisman, managing director, Scotia Waterous. “There is lots of cash in the industry.”
Goodisman spoke to attendees at Hart Energy Publishing’s A&D Strategies & Opportunities Conference in Dallas Wednesday. Waterous was acquired last year by the Bank of Nova Scotia and has become the bank’s oil and gas mergers and acquisitions (M&A) arm.
In Goodisman’s universe of E&P companies, about 44% of cash flow can be considered “excess,” and the majority of these dollars is out chasing deals, he said.
Goodisman, an alum of Ziff Energy Group and Phillips Petroleum prior to that, presented a chart displaying E&P cash flow, asset supply and the average spot price of natural gas, year by year, 1999 through the first half of 2006. The supply of assets stood at about $7 billion in 1999 and (despite a low of about $4.5 billion in 2001) hovered fairly close to that number through 2003. There was a bump up to about $11.5 billion in 2004 and a jump to $15 billion last year.
Over that same period, though, the average spot price for gas climbed from $2.50/MMBtu to nearly $9/MMBtu in 2005. Cash flows followed similar marching orders, climbing to about $45 billion last year from a mere $9.5 billion in 1999. In short, more and more money chasing not that many more assets led to a superheated market that’s with us today. While the first quarter has seen a falloff in gas prices and cash flows, there also has been a substantial drop in the asset pool, to about $5 or $6 billion.
From 2001 through 2005, reserve values for gas and oil both have climbed along with spot prices, according to another Goodisman chart. During this run-up in the valuation of proved reserves, natural gas has been the star, at least until this year when skyrocketing oil prices and a falloff in gas prices pushed valuations for oil reserves to the fore.
Proved gas reserves were worth about $1/Mcfe in 2001 while oil reserves were worth about 85 cents/Mcfe or $5.14/bbl. In 2005, gas reserves were worth about $2.10/Mcfe, and oil was at about $1.60/Mcfe or $9.59/bbl. In the first half of this year oil overtook gas; proved oil reserves are worth about $2.68/Mcfe or $15.96/bbl to about $2.38/Mcfe for gas.
But not all assets are the same, of course. In the valuation of U.S. proved reserves, it’s the Gulf of Mexico and Ark-La-Tex that get the most glory. Offshore Gulf assets are worth about $3.37/Mcfe, Ark-La-Tex about $2.69/Mcfe and onshore Gulf about $2.46/Mcfe. The next highest region is the southeastern United States at $2.01/Mcfe and the Appalachian basin at $2.00/Mcfe. South Texas comes in at $1.99, and the other regions are all also less than $2.00.
The view changes when one looks at production valuations. Because Gulf reserves are relatively short-lived, they fetch a greater “in-the-ground” valuation, Goodisman explained. When production is considered, the Ark-La-Tex is the leader at $12,428 per Mcfe/d of flowing commodity. The Permian basin fetches $11,606 per Mcfe/d; the Midcontinent gets $11,501 per Mcfe/d, and the Southeast gets $10,099 per Mcfe/d. Gulf Coast onshore production is worth $9,107 per Mcfe/d, Rockies $8,631 per Mcfe/d, South Texas $7,328 per Mcfe/d, and Gulf of Mexico offshore $6,301 per Mcfe/d.
Looking at the number and cumulative value of U.S. asset transactions reveals substantial growth in deal value without a corresponding increase in the number of deals. Over the last two years the quarterly average value of transactions was about $4.3 billion, according to Goodisman. Over the preceding four years the quarterly average was about $2.15 billion. Goodisman noted that recent increases in transaction value are due to some large scale Gulf of Mexico divestitures. The number of deals also is up as companies monetize assets in the current high commodity price environment.
“With the run-up in commodity prices, assets that used to sell for $50 million a few years ago are now selling for $70-80 million,” said Goodisman.
So, who’s buying at these rich prices?
The profile of large cap companies in the asset marketplace has grown every year since 2002. So far this year, large caps account for about 50% of total transaction value, up from about 38% last year, according to Goodisman. Gulf of Mexico deals dominate this year. Onshore, Chesapeake Energy was the most acquisitive of the large caps with purchases of more than $1.7 billion so far this year. Mid caps, such as W&T Offshore, have seen their presence grow since 2004, now accounting for about 28% of deals. Private companies are currently the next most active group, followed by small caps. Major producers and pipelines have been relatively quiet.
“On the one hand you’ve got the large cap companies that are buying, and on the other hand you’ve got the large cap companies that are selling,” said Goodisman. Anadarko, which is rebalancing its portfolio, is an example, said Goodisman. Anadarko recently said it will sell Anadarko Canada as it trims debt related to the acquisitions of Kerr-McGee Corp. and Western Gas Resources (see Daily GPI, June 29).
“The other group of companies that has been doing quite a bit of sales is the private companies,” Goodisman said, noting that there are two types: family companies and firms backed with private equity. Family companies are seeing a profit-taking opportunity in today’s market. And private equity is flipping its holdings faster, bringing properties to market much earlier in their life cycles, Goodisman noted. “Some of these guys are starting and selling out in two years, one to two years, and then restarting again.”
Not only are private equity players selling out faster, they’re spending more when they buy. Goodisman said he used to get calls from private equity firms looking for deals between $25- and $50 million. They’re now chasing deals of $500- to $700 million. Add to that hedge fund money that’s coming into the upstream and the industry is awash in cash.
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