Houston – Expect increasing consolidation in the oil and gas sector as a way to cut costs and spur growth after a longer-than-usual recovery period, Citi vice chairman and global energy investment banking chief Steve Trauber told a Thompson & Knight energy symposium in Houston on Thursday.
“Consolidation is close,” Trauber said. “Strategics are starting to talk about combining their positions. It’s going to be good for bankers and lawyers.”
Given their growth struggles and challenged business models, the Houston-based banker thinks even the major oil companies are considering combining, much as they did in the late 1990s and early 2000’s. Trauber cited such potential combinations as BP-Royal Dutch Shell and even ExxonMobil-Chevron, which are both beginning to exploit their positions in West Texas’ and New Mexico’s rich Permian Basin.
Trauber said Citi itself is currently working to sell three or four oil and gas exploration and production companies and six midstream, or infrastructure, entities.
“There are 80 companies in the Permian operating one rig and there are 50 private equity-backed companies [in the basin],” he said. “There has to be consolidation to drive down costs.”
Trauber also expects consolidation in the still suffering oilfield services sector, which has already seen the combination of General Electric’s oil and gas unit with Baker Hughes; Transocean Ltd.’s $1.1 billion acquisition of Songa Offshore; and Ensco plc’s $839 million purchase of Atwood Oceanics Inc., which closed this week despite objections by activist investors.
Rumors are rife about other potential deals emerging in that portion of the industry. The Wall Street Journal reported in the last week that takeover talks between Baker Hughes and Subsea 7 SA broke down over price, and that Helix Energy Solutions Group Inc. was exploring a possible sale. In August, it reported that Dover Corp. was exploring strategic alternatives for its energy business.
“Five pressure pumping companies filed for IPO’s,” Trauber said. “Two got out and three are waiting, but the market is saying, ‘No more.’ That means consolidation.”
Houston-based Keane Group Inc. and Midland, Texas-based ProPetro Holding Corp. were the two such companies that were able to go public. Among those who didn’t: Denver-based Liberty Oilfield Services Inc., which postponed its $250 million IPO in May (leaving unused its planned ticker symbol BDFC, which stood for “Best Damn Frack Company”). The company is backed by the private equity firm Riverstone Holdings.
Trauber doesn’t think oil prices will get back to $80 to $100 per barrel anytime soon, probably staying around $50 “plus or minus $5” for the foreseeable future. He said it’s not a bad price, as many Permian producers can make money at $40 and above. But it doesn’t help offshore operators, who need more like $65 per barrel, and sovereign/national companies, which need more like $80 to $90 to support their countries’ social programs.
Trauber thinks natural gas prices will probably remain at around the $3 per thousand cubic feet equivalent level.
In terms of dealmaking in the U.S., Trauber is seeing a lot of interest in the Eagle Ford, where Anadarko Petroleum Corp. sold assets to Sanchez Energy Corp. and the Blackstone Group in January for $2.3 billion. He thinks other companies operating in the area “will likely consolidate,” as they are growing more slowly than their Permian peers but are easy to leverage because of the cash they throw off.
The banker also sees a lot of interest in the mid-continent, most notably the oily STACK play in Oklahoma.
On the gas side, Trauber expects deal activity in Marcellus Shale, which covers a large swath of Appalachia, and the Haynesville Shale, which is in East Texas and northern Louisiana.
Trauber said the markets are giving higher valuations to companies with good returns on capital that are starting to return that capital to shareholders through increased dividends and share repurchases, like the $2.5 billion buyback program Anadarko announced last month. “You’re starting to see markets pay for strength,” he said.
The banker said activism also has returned after taking a hiatus during the downturn, noting the Ensco-Atwood deal as well as Jana Partners’ announced opposition to EQT’s $6.7 billion purchase of Rice Energy (Citi advised EQT). He said Jana “got burned” by shorting Rice and going long EQT and thinks shareholders will approve the deal at the upcoming vote.
Trauber also noted that the debt markets have improved significantly, which makes dealmaking more possible, and that more and more SPAC’s — or special purpose acquisition companies — are coming to the IPO market (including Sentinel Energy Services, which is led by former Schlumberger CEO Andrew Gould).
The banker thinks premiums being paid for target companies will go down and that more deals will be crafted with “earn-outs,” in which the seller can make more money later depending on whether certain financial thresholds are met. “They’re a great way to close the gap between buyers and sellers,” he said.