Following a rise in popularity in the oil and gas upstream sector in 2010, joint venture (JV) agreements played a dominant role as a source of low cost funding in 2011, with unconventional resources drawing the most attention, noted analyst at Stifel Nicolaus.
“After seeing a material increase in JV funding in 2010, we saw 2011 JV deal level remain relatively constant at $11.6 billion, representing 11% of E&D capex spending (down from 13% last year due to increased E&D spending) and 17% of total US deal flow (down from 18% last year due to increased M&A),” said the analysts.
A focus on liquids-rich plays and slight decrease in deals made with Asian and European companies were key trends that emerged in the JV market in 2011.
According to the analysts, “Eagle Ford deals dominated 2011 transactions and acreage values in the region continued to rise, Utica valuations came in starting at a higher acreage value than initial deal values seen in new emerging areas. Asian firms accounted for 40% of total value, down from 61% in 2010, Europeans: 27% vs 38% in 2010, and North American firms for 33% versus 1% in 2010.”
Carry over suspensions in low gas price markets and JVs covering several different plays were also elements seen in deals in 2011.
And while the liquids-rich plays such as the headline-grabbing Eagle Ford Shale and the Utica were the more popular of the plays in 2011, unconventional resources of all types spawned JV activity, wrote Infor’s Rod Radojevic in an article for OGFJ.
“The upstream oil and natural gas industry is in fact seeing a new uptick in JVs to accommodate the meteoric growth of activity in North America's unconventional gas and oil plays, notably the shale plays,” he said.
But while the unconventional resources space has certainly provided a fertile ground of potential deal activity, what kind of deals should we expect to see in 2012?
Analysts at Stifel Nicolaus see joint venture activity slowing in 2012 while mergers and acquisitions pick up. “In 2012, we believe that M&A could make up a greater portion of deal dollars given eroding balance sheets, expectations of a weak gas market for the full year, and what could be a closing of the equity window for E&Ps to fund shortfalls. As a result, we expect the M&A component of all deal dollars to increase from the 17% level in 2011. If corporate M&A picks up, we believe that the JV absolute dollar value could decline from the current 17%, but that the impact from the carry component will make the capital available to be spent from JV partners still very meaningful at over $6 billion, but down from over $8 billion in 2011,” they explained.
One thing for companies to keep in mind might be the publicity surrounding a potential JV before closing. According to Stifel Nicolaus’ calculations, “On average, the relative stock price outperformance on the day of a JV announcement has averaged 2% over the 18 deals we have analyzed, as JV expectations get factored into the stock between the company announcing the start of the JV process, and when the process concludes. The greatest outperformance was recorded for deals where a JV process was not well publicized prior to the announcement.”
That being said, some firms publicly looking for a partner to develop assets include Forest Oil, Chesapeake Energy (no stranger to the JV with a recent Utica deal signed with Total), and possibly PDC Energy, Gulfport Energy (who recently announced a planned equity offering to fund Ohio Utica Shale development), Zodiac Exploration, and Bill Barrett.
