The US economy may be stalled, but the energy transaction market is not. At least that's the impression I got from a recent breakfast presentation by the Houston office of Madison Williams during the Summer NAPE event. There are other indicators, too, that suggest the M&A market is fairly robust, taking into consideration the overall economy.
Sylvia Barnes, who heads up the energy practice for Madison Williams (formerly SMH Energy), pointed out that her firm had been involved in 21 transactions so far this year, valued from roughly $10 million to $500 million. Her firm acts as a financial advisor and is often asked to issue "fairness opinions" involving energy deals.
What is driving this activity? A variety of conditions in the oil and gas industry, not the least of which is the "race to liquids" that Bentek's Rusty Braziel wrote about in the August issue of OGFJ. E&P companies are emphasizing liquids-rich production over natural gas because of continuing depressed prices for the latter commodity. Crude oil prices have fallen from near $80 to closer to $70 as of this writing, but the economics are still better for crude and natural gas liquids than natural gas for the foreseeable future.
As a result, oil- and liquids-rich plays like the Bakken, Eagle Ford, Granite Wash, and Marcellus are getting a lot of attention these days. Similarly, Permian Basin assets have become hot properties for many producers in part because horizontal oil wells are providing some of the best economics in the US. At least that's the view of Dahlman Rose & Company's Nicholas Pope and Shaan Sheikh in their recent equity research newsletter.
I spoke with Parallel Petroleum CEO Larry Oldham during NAPE, who agreed with this assessment. The Midland, Tex.-based producer has been steadily increasing its oil and liquids production since going private a few years back. Larry said he didn't miss the reporting requirements and related issues of being a public company and added that Parallel Petroleum would be interested in acquiring oil or liquids-rich assets "for the right price." The company currently has holdings in the Permian Basin of West Texas and New Mexico and the Barnett Shale in North Texas.
A key question is whether or not the premium value for high-BTU gas and crude/condensate production will continue. Most of the larger shale gas producers have shifted significant budget dollars to liquid-rich plays, but as Rusty Braziel points out, "There is a catch."
To realize the higher wellhead value for high BTU gas, the producer must run what Rusty calls the "NGL Value Chain Gauntlet." NGLs must be extracted at a processing plant, the liquids must be fractionated (split into individual NGL components), transported to market, and finally, that market must be large enough to absorb the new supply without a detrimental impact on price.
Rusty concluded, "Producers in areas suffering downstream capacity constraints may find the economic benefits of high-BTU gas will be difficult to realize."
Raymond James' research agrees with this conclusion. Darren Horowitz and James Allred, two RJ energy researchers and analysts, point out that a major concern is that vastly increased production will create a supply glut in NGL markets, similar to what has unfolded in natural gas markets, leading to a prolonged period of depressed NGL prices.
Nevertheless, both domestic and global energy players are continuing to invest in unconventional resource plays, and operators and oilfield service companies in the US and Canada say they have developed the technical expertise to make the plays economical in low-price environments. Companies such as Statoil, BP, and Total have formed partnerships with US operators in part to gain expertise in horizontal drilling and fracturing techniques in shale and other unconventional resource formations that they plan to use in other parts of the globe.
As a result, energy transaction activity — both for producers and oilfield service companies — has picked up. The same is true for investments and partnerships involving the midstream sector, which is key in building out transportation infrastructure. Just this week, Houston's Enbridge Energy Partners and Enbridge Income Fund in Calgary launched a $550 million project in the Bakken to expand crude oil pipeline capacity to accommodate rapidly growing production in the Bakken and Three Forks formations. Scheduled for completion in 2013, the project will move about 145,000 barrels of oil per day and can be expanded to 325,000 bpd at low cost, according to a company spokesman.
It's comforting to know that the weak economy hasn't curtailed investment in the energy sector. It's also good to know there are still many opportunities available to producers, midstream companies, and service companies here in North America. OGFJ
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