U.S. Gas Assets Likely to Trade at Discount for 2011 M&A Deals

U.S. natural gas assets will likely continue trading at a large discount to equivalent liquids assets in merger and acquisitions (M&A) activity during 2011, with only a modest growth in gas prices predicted, said Eoin Coyne, M&A expert at London-based Evaluate Energy.

Smaller U.S. gas focused companies may consolidate or be acquired by companies who can afford to take a longer view on gas price predictions, Coyne noted. Meanwhile, shale plays in Europe may start to attract larger investments, although this prediction may be one year too early.

Oil sands merger and acquisitions have been quiet in recent years since the credit crisis and consequent drop in oil prices; however, this area may be revived if the oil price continues at current levels.

"Other M&A hotspots may develop over the year if positive exploration results from new frontier areas come through, i.e. Greenland/Falklands/newly explored African countries/new U.S. or Canadian plays such as the Alberta Bakken," Coyne said.

The new year could see the expansion of Indian national oil companies to expand further overseas following the country's sustained economic growth. Chinese foreign oil acquisitions will likely continue as the country looks to secure long term oil security, Coyne noted.

Evaluate reported that oil and gas deals in the E&P sector reached $73 billion in the fourth quarter of 2010 with deals for the year totaling $238 billion, compared with $151 billion in 2009. Evaluate noted that total deal value in the last quarter of this year is second only to third quarter of 2010 in recent years, even outscoring the fourth quarter of 2009, a quarter that included ExxonMobil's $41 billion acquisition of XTO Energy.

Jon McCarter, transactions lead at Ernst & Young, expects to see gradual improvement in M&A activity in 2011 as liquidity returns to the markets, making more M&A deals possible. McCarter said he anticipates larger oil and gas players to continue with their asset divestiture programs through 2011, with investors looking for assets in U.S. gas plays with strong liquids content as U.S. gas prices remain depressed. Joint ventures and other means of raising funds also will help spur transaction activity in 2011.

Liquids rich plays such as the Bakken, Niobrara, and Eagle Ford shale plays will continue to attract interest in 2011. "Whether it's European or Asian companies investing here, now is the time to learn [how to drill shale] with costs lower, then redeploy that technology closer to home when the time comes," McCarter said.

Meanwhile, uncertainty remains over future Gulf of Mexico drilling activity following the Macondo oil spill last year and uncertainty over potential environmental regulations for hydraulic fracturing onshore. "The question for the Gulf of Mexico is, can everyone that's there continue?" As a result, McCarter sees more potential for consolidation and divestiture. Regulations driving larger scale operations also mean more consolidation among oil and gas companies.

McCarter expects to see companies with intellectual property or developing technologies, including horizontal drilling, being in high demand. Korea, China, Japan and India are expected to continue showing significant interest in acquiring interests in shale plays and oil sands.

He also anticipates more M&A activity in 2011 as private equity funds, which spent the economic downturn on the sidelines, are now under pressure to deploy capital raised into the market. "Part of it is behavioral, the need to be in the game."

According to Ernst & Young, total industry transaction value, including North America, topped $266 billion, up 33% from 2009, which included the huge ExxonMobil/XTO transaction. Total number of deals was up 13% from 2009, with deals reported having values that were up 2%.

Total industry transaction value for the U.S. alone was $117.6 billion, up 9.3% from 107.6 in 2009. Total number of deals was up from 307 in 2009 to 448 in 2010, a 45.9% increase, Ernst & Young noted.


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