© 2013 The Texas Lawbook.
(January 23) – Chad Watt is an M&A analyst and editor with mergermarket, an independent global research firm associated with the Financial Times. Chad also is the most knowledgeable M&A analyst and journalist in Texas.
The Texas Lawbook: Which M&A trends stand out to you over the past five years?
Chad Watt: In 2008 and into 2009, we saw the first wave of “fuel-switching,” as natural gas prices remained low and oil prices scooted toward $100 a barrel. That led to wave after wave of upstream companies switching their focus from natural gas (in the Barnett Shale and similar fields in Louisiana and Arkansas) to more oil-rich provinces, such as the Permian Basin.
The Texas Lawbook: How did M&A change in 2013?
Chad Watt: Midstream deal activity took center stage as the natural follow-up to the development of oil and gas fields in previously dormant regions. New pipeline networks and related processing facilities need to be built. The people who funded that construction and lined up contracts to fill the pipes spent much of 2013 selling complete (and near complete) projects to master limited partnerships, which are built for steady income-producing assets, but generally avoid the risk that comes in the construction and contracting phases.
The Texas Lawbook: What about M&A by the E&P companies?
Chad Watt: On the upstream side, 2013 was a year of no true megadeal in the spirit of Exxon-XTO or BHP Billiton-Petrohawk. The biggest deal was Devon Energy acquiring GeoSouthern (a private company focused on the Eagle Ford in South Texas) for $6 billion. (extra space^^)
The Texas Lawbook: Is that likely to continue in 2014?
Chad Watt: Midstream assets will continue to change hands as they mature. The chances of a megadeal (a transaction with a deal value greater than $10bn) I think will go up on a global scale because you have four sets of buyers competing for upstream assets: Private equity firms, with billions of dollars in capital committed to energy businesses, MLPs which are constantly chasing new assets and benefit from low interest rates, national oil companies (state-sponsored enterprises) with nearly unlimited checkbooks, and the super majors, including Exxon, who have been quiet on the corporate acquisitions front.
The Texas Lawbook: What do you see coming regarding IPO activity?
Chad Watt: A growing cohort of PE-backed upstream companies are finding themselves “too big to sell.” Simply, they’ve done too good a job at securing assets and developing production for mid-cap upstream companies to consider buying them. At the same time, mid-cap and large cap independent upstream companies are managing through “deal indigestion” as they work to prove and produce oil and gas assets that they picked up in prior years.
That leaves their sponsors looking to the public markets for an exit from their investment. Examples in 2013 included Fort Worth-based Athlon Energy and Dallas-based RSP Permian. EP Energy (the upstream piece of El Paso Corp that’s been in PE hands, based in Austin) and Rice Energy out of Pennsylvania will issue an IPO in January.
And then the midstream side should produce its own wave of IPOs as integrated companies look to unlock value by spinning out their infrastructure systems into their own public MLPs.
The Texas Lawbook: Master Limited Partnerships seem to becoming the preferred business structure for a growing number of oil and gas companies, especially among midstream firms.
Chad Watt: Until interest rates increase appreciably, MLPs on the midstream and upstream side have ample access to the cheapest capital available in the energy space. That means upstream operators can win bidding wars for good oil and gas assets and midstream operators can continue buying good infrastructure systems without breaking stride.
Low interest rates and investor appetite for yield has driven MLP unit prices (like share prices) upward. Some in the space are describing it as frothy.
The Texas Lawbook: Are joint ventures in the oil and gas sector going to continue?
Chad Watt: JVs were a solution to dual problems, both of which have abated, so expect to see fewer stateside JVs going forward. Foreign enterprises and states wanted to participate in the North America shale revolution, but wanted to avoid the political blowback that came when China National Offshore Oil Corp. attempted to buy Unocal.
Upstream operators in the U.S. ran into cash crunches after 2008 and when natural gas prices didn’t follow oil back up the price chart. With clocks ticking on their leases, the U.S. independents were happy to share the upside with foreign investors.
Now, capital is ample for U.S. energy producers. Foreign oil operators are looking more to develop their own assets and acquire far-flung assets that U.S.-focused players are divesting.
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