Most U.S. land buyers today are foreign companies that want to snap up unconventional prospects, and most are oil-driven. However, with natural gas prices rising, merger and acquisition (M&A) deals are likely this year, especially for operators struggling with costs, according to a PwC energy expert.
“Gas prices have increased on a lot of cold weather in the Northeast this spring, which helped,” said PwC’s Rick Roberge, a principal in the energy deals practice. He spoke with NGI Tuesday.
“But the outlook [on prices] is still a mystery for natural gas…Operators are locking in hedges and that will help them get through the year, but we are still not seeing major gas drilling at $4.00 prices, and the longer the prices stay at $4.00, the more likely we will see some consolidation” among operators this year.
There might be peer-to-peer consolidation, but “absolutely, it will be the bigger companies buying the smaller ones that are leveraged to natural gas,” he said. The gas-focused producers “are hanging in there waiting, but in the long run, I still think a major reason [for consolidation] is that gas shale companies are going to have to deal with the fact that they have to raise enough capital to develop the play.”
In the first quarter, there was “a divergence in buyer-seller price expectations around gas assets, as natural gas prices bumped up from recent historical low levels,” said Roberge. “These higher valuations for gas assets, combined with continued high valuations in the sweet spots of the liquid-rich shale plays, were a major contributor to private equity [PE] firms largely sitting out this quarter, but it’s critically important for PE and strategics alike to be ready when an opportunity surfaces and prices are more favorable, as buyers will be lining up…”
Although land valuations are high, there is “optimism” among operators for more deals.
According to PwC’s latest report, U.S. M&A deal volume and value rose year/year in 1Q2013, in 39 deals worth $27 billion, versus 34 transactions worth $25.7 billion, according to PwC’s Oil & Gas M&A analysis. The quarterly report on announced domestic transactions valued at more than $50 million is compiled using data from IHS Herold.
There were 18 deals valued at $50 million-plus for shale-related acquisitions, totaling $16.3 billion, or 60% of all the deals. In the upstream sector, shale deals represented 11 transactions and accounted for $5 billion, or 40% of total upstream deal value.
Foreign buyers “are still looking for opportunities to expand in U.S. shale plays and are extremely active in upstream prospects — and they’re willing to acquire those assets at a premium,” said Roberge.
Foreign buyers announced nine transactions from January to the end of March, which contributed $4.1 billion, or 15%, of the total deal values, versus six deals valued at $5.9 billion a year ago. On a sequential basis, the number of total deals was the same, but values in the final three months of 2012 were 28.1% higher.
PE, meanwhile, “typically requires returns, which are in excess of what a large company would require,” he said. “The cost of capital is higher, and investors demand higher returns.” PE needs “something special about a transaction that they can see on a three-, four-, five-year note to make the kind of returns they need. But you can’t start out with a high purchase price, whether it’s seven or eight times cash flow on upstream properties…If you start with a high price, that makes it difficult. PE is not going away, and there is lots of money, but they’ll be happy to wait.”
PE deal activity was low, with only two transactions in 1Q2013 with values surpassing $50 million, representing a total deal value of $576 million, versus a year ago when seven financial sponsor-backed deals were worth $13 billion. Additionally, 34 strategic deals contributed $26.4 billion and made up 98% of total value early this year.
For deals valued at more than $50 million, 23 were in the upstream, representing $12.6 billion, or 47%, of quarterly values. Eleven oil deals in the upstream were announced, versus five natural gas transactions. There also were 11 midstream deals that contributed $10 billion, a 120% jump from the five worth a total of $3.2 billion a year ago. Three downstream deals added $3.9 billion, while oilfield services contributed two deals worth $465 million.
Also of note in 1Q2013, master limited partnerships (MLP) were involved in eight transactions, representing more than 20% of total activity “and continuing the trend of MLP involvement in deal transactions, as MLPs represented 20.6% of total deal activity in 2012,” PwC said.
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