Energy executives seem to be feeling more confident about the future, evidenced in recent surveys and sealed by the surge in merger and acquisition (M&A) activity since late 2009.

ExxonMobil Corp.’s announcement it was buying onshore gas producer XTO Corp. for $41 billion in December (see Daily GPI, Dec. 15) may not be the benchmark on which to judge other transactions in the past few months. The $11 billion acquisition of Smith International by Schlumberger Ltd. also may be well above even the flush companies (see Daily GPI, Feb. 23).

However, there is no disputing that a lot of money and property is changing hands between natural gas and oil producers, the power industry and among oilfield service companies, sometimes piling on deals rapid-fire. Some of the more solid companies have found “powder to burn” and are willing to use it, Apache Corp. CEO Steve Farris said earlier this month.

Apache is certainly bringing its money to the table. The Houston explorer spent $1.03 billion in mid-April to buy Devon Energy Corp.’s shallow water Gulf of Mexico properties (see Daily GPI, April 13). Less than two weeks later Apache said it would pay an estimated $2.7 billion to merge with Mariner Energy Inc. (see Daily GPI, April 16).

The Mariner merger began with a phone call to CEO Scott D. Josey, Farris said earlier this month. Within days, the deal was done.

“Things really started rocking and rolling the second half of last year,” said Baker Botts M&A partner Kelly Rose, who represents Mariner in its merger with Apache. “They’ve just continued to get busier,” she said.

The biggest power deal this year to date is the tie-up between FirstEnergy Corp. and Allegheny Energy Inc. The merger, announced in February, is worth an estimated $4.7 billion in stock and another $3.8 billion in debt.

During a conference call in February to discuss the transaction, Allegheny CEO Paul J. Evanson was asked why he would pursue a negotiated transaction now, particularly prior to an economic recovery and presumed appreciation in the value of Allegheny shares.

“I think everyone believes we’re quite a bit leveraged to an economic recovery…You might like to do [the deal] when the stock price is $65, but nonetheless, this is the right time to do it,” Evanson said.

Within North America’s energy sector, a sampling of some of the recent, large M&A transactions include:

Since the beginning of the year, Thomson Reuters estimates that the energy industry has had at least 46 transactions worth $500 million or more, which is well above the financial sector, which had just 31 transactions.

“Improving market conditions have more companies shopping again, and those with capital to deploy are ahead of the game,” said Richard Jeanneret, vice chairman of transaction advisory services at Ernst & Young. “There’s a greater focus on growth opportunities, and M&A is one way to achieve that goal.”

Also lifting the energy M&A worldwide is China. Acquisitions by Chinese national oil companies made up almost 40% percent of the value of transactions outside the United States in the first quarter, according to IHS Herold. Bidding pressure from Chinese companies, including on ConocoPhillips’ oilsands deal, pushes up the value of the transactions, IHS Herold noted.

Several Houston-based M&A lawyers told NGI that work related to energy master limited partnerships (MLP) also has been consuming a lot of time. The MLPs are spinning off more transactions as they acquire assets, raise cash in public offerings and seek financing.

A survey in late March of energy executives, which was conducted by Ernst & Young, found energy market sentiment was “relatively positive” (see Daily GPI, April 22). According to the consultant, M&A transaction activity in the first quarter jumped above $70 billion in deal value.

The Capital Confidence Barometer, a biannual survey of more than 800 professionals worldwide, found that 57% of businesses said they are likely or highly likely to acquire a rival in the next 12 months; 47% expect to reach a deal in the next six months.

Six months ago the Barometer found that only 33% were planning acquisitions over the coming 12 months, with about a quarter anticipating M&A activity within six months.

Another survey tapping the pulse of the market is the Brunswick Group, a corporate communications firm, which found bankers and lawyers — those who get the deals done — are even more optimistic about deal-making, with two-thirds saying that M&A activity was on the rise.

“Confidence in the credit conditions is improving,” with around two-thirds (62%) telling Ernst & Young that they could obtain financing for major capital projects and acquisitions in the next 12 months. Up to now, most deals have been cash-based because of the lack of bank financing.

Over the next six months, nearly 50% of the energy executives said they would sell a piece of their businesses or buy something. But, going deeper, the broader market is not as enthusiastic as is the energy sector, the various surveys found.

“While the global financial crisis is still impacting deal flow, there is evidence of loosening in capital markets,” said Jon McCarter, Ernst & Young’s Transaction Advisory Services leader for the Americas Oil and Gas Center. “While there are fewer deals made, they have been greater in value than [in] recent quarters.”

Against “a backdrop of increasing optimism we still see some significant challenges ahead,” said Jeanneret. “For instance, a wave of refinancing is expected with 58% of companies needing to refinance loans or other debt within the next four years – so access to capital markets remains crucial.”

But activity, McCarter said, is definitely on the rise. “And we can expect to see more activity in unconventional shale plays and consolidation in the oilfield services segment.”

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