The long-term fundamental outlook for oil and gas mergers and acquisitions in North America is the best it’s been in the past 20 years, which is very good news for investors and energy companies. This view was expressed by Bobby Tudor, chairman and CEO of Houston-based investment bank Tudor, Pickering Holt & Company, on November 13 at the IHS Herold Pacesetters Energy Conference in Washington, DC.
Tudor was one of the expert panelists in a session on industry M&A trends and opportunities. Other panelists included Robert Weiner, professor of international business at George Washington University and Sam Oh, a partner in Apollo LLP, a prominent private equity firm.
Tudor provided an overview of M&A activity and the trends driving M&A transactions, globally and specific to North America. Internationally, he pointed to recent “world-class discoveries” on both the east coast and west coast of Africa. Global fundamentals, he said, are decent, but can change quickly.
He said a North American renaissance is unfolding due to unconventional oil and gas development, which makes it a very attractive place to do business for at least the next 10 years.
“There is no near-term relief for natural gas, so consolidation will continue,” said Tudor, adding that soaring drilling and development costs are so high that smaller companies will be unable to take advantage of the opportunities. Supermajors and IOCs will be the beneficiaries, he said, because only they have the financial power and the long-term stamina needed to develop assets and hold on to them despite chronically depressed natural gas prices.
As far as corporate consolidation is concerned, Tudor said, “There is only so much candy in that jar. Smaller independents will be forced into selling out because they can’t access enough cash.”
Apollo’s Sam Oh pointed out that both oil imports and oil consumption has been declining in the US for several years. “Both peaked in about 2006-2007,” said Oh. “However, both have been moving down since then.”
Yet, upstream capital spending has been accelerating, primarily as a result of the tremendous growth in unconventional resources, which require huge amounts of cash due to the technology required to drill and produce.
“Since 2007, the cost of drilling a well has increased 16-fold,” said Oh. “It now costs a minimum of $5 million to $6 million to drill a horizontal well, and over 50% of the cost is in completion.”
He added that only “megacorporations like ExxonMobil and Shell” can fund a capex program with cash flow. “Anyone below this threshold cannot,” he said.
Professor Weiner discussed the reasons that resource-poor countries in Asia like China, Japan, India, and South Korea have been seeking to acquire petroleum reserves in North America. He posed the question: Do resource-poor countries act on a commercial basis in buying energy resources abroad, or are they acting as instruments of state policy? He analyzed the data and determined that, despite popular opinion, there has been no significant difference in acquisition prices paid by resource-poor countries and resource-rich countries – meaning that offers and acquisitions by companies such as China’s CNOCC appear to be acting on a commercial basis.
“Home country policy for energy security may not be significantly influencing business investor behavior, as widely reported in the media,” concluded Weiner.
Tudor, Oh, and Weiner agreed that environmental factors and social issues are increasingly becoming a factor in investor decisions with regard to oil and gas investments. “Environmental risk is important and will become more important in the future,” said Weiner.