Increasingly high finding and development (F&D) costs are expected to cause a spike in M&A in the second half of 2005, according to PricewaterhouseCoopers. M&A activity has slumped in recent months due to companies' continued preference to use extra cash for stock buybacks and dividends rather than acquisitions. It's the independents that are expected to step up and lead the trend. "While the majors prefer the economics of international ventures over acquiring a company and integrating it, the independents will return to the M&A market in a major way," says Rick Roberge, U.S. leader of PricewaterhouseCoopers' Houston-based transaction-services practice. "Despite the fact that it costs $8.50 to $9 per barrel to buy reserves on Wall Street through acquisitions, F&D costs are running in excess of $10 per barrel. For companies eager to replenish their oil and gas reserves, that's an attractive equation." One of the biggest factors driving M&A activity during the next six to 12 months will be growing demand, particularly in China and India, he adds. "M&A may prove the only solution for many independents who need to grow, but can't count on big investment projects and don't have a sufficient inventory of projects to grow by the drillbit." Big Oil is conservative-for now. "The majors are spending less on investment and M&A than they have been in previous high-commodity-price cycles," he says. "An internal shift in project economics from $20 to closer to $30 would increase investment and put more projects on the table, particularly with national oil companies. Until then, look for more buybacks and dividend payouts." But, independents are looking to buy. "Because sellers can get the best price now and buyers need to grow, activity will heat up," Roberge says. Gas reserves and production are ripe M&A targets. "Look for more acquisitions in this sector, given tight supply and prices exceeding the $6 level," he says. "With major (liquefied natural gas) projects still years away, Alaskan gas pipelines nowhere near done and big production declines in the Gulf, natural gas will continue to be an important part of the M&A story going forward." The only variable that could put a dent in Roberge's theory is a major drop in oil prices. But "that just doesn't seem to be in the cards, certainly for the balance of 2005," he says. "Some of the majors may still assume that $25 is the midcycle price, but what could create that price? A significant unexpected drop in Chinese demand? A dramatic increase in near-term reserves? Substantial production quota increases from OPEC? Less political risk in major oil-producing countries like Nigeria, Venezuela or Saudi Arabia? It just doesn't seem likely."
Recommended Reading
CoolCo, GAIL Enter Long-term LNG Agreement
2024-05-16 - CoolCo and GAIL’s agreement is intended to secure long-term LNG supply in India’s market, with GAIL having an option to extend the 14-year agreement by another two years.
Gunvor Group Inks Purchase Agreement with Texas LNG Brownsville
2024-03-19 - The agreement with Texas LNG Brownsville calls for a 20-year free on-board sale and purchase agreement of 0.5 million tonnes per annum of LNG for a Gunvor Group subsidiary.
CPS Closes $785MM Deal for Talen Energy’s Texas NatGas Plants
2024-05-01 - CPS Energy has acquired all assets associated with the 897-MW Barney Davis and 635-MW Nueces Bay natural gas plants in Corpus Christi, Texas, and the 178-MW natural gas plant in Laredo, Texas.
Texas LNG Export Plant Signs Additional Offtake Deal With EQT
2024-04-23 - Glenfarne Group LLC's proposed Texas LNG export plant in Brownsville has signed an additional tolling agreement with EQT Corp. to provide natural gas liquefaction services of an additional 1.5 mtpa over 20 years.
Babcock & Wilcox to Convert Coal Plant to NatGas
2024-03-18 - B&W will convert the plant’s two coal-fired boilers to natural gas by designing and installing burners, air systems, fans and other equipment.