What do these upstream transactions have in common: Apollo Global Management's acquisition of El Paso Corp.'s E&P assets for $7 billion; Marathon Oil Co.'s purchase of Hilcorp Energy Co.'s Eagle Ford assets for $3.5 billion; and Linn Energy's $1.2-billion deal for Kansas Hugoton assets from BP Plc?

Steve Toon

Answer: The buyers represent a dominant and aggressive breed of acquirers of E&P assets. Financial players, yield-oriented producers and newly independent E&Ps spun out of majors have risen to the top as consistent winners in negotiated transactions in recent months, and are hungry for more.

Apollo senior partner Sam Oh, Linn Energy senior vice president of finance and business development David Rottino, and Marathon vice president of business development Steve Guidry discussed their strategies at Hart Energy's A&D Strategies and Opportunities Conference in September.

Apollo's Oh was an integral player in the private-equity firm's E&P carve-out with El Paso. Apollo put together a consortium of financial investors to fund the multibillion-dollar price tag. When asked what has attracted mega private equity to the energy sector, Oh pointed to the numbers. Capex spend for unconventional plays in North America has increased from $6 billion in 2003 to $120 billion through 2011—a 20-fold increase.

"The pie is getting bigger," said Oh. "Why is private equity on the scene? It's partly because of necessity." The lion's share of smaller companies cannot hold onto unconventional acreage without capital coming from sources other than cash flow. And public capital markets can be cyclical. "We have tremendous capital needs."

Oh says it is pure coincidence that fellow private-equity mega player KKR's similar $7-billion deal for Samson Resources went down so close in time to Apollo's, but the two opportunities were driven by a unique set of circumstances surrounding historically low natural gas prices that are hard to replicate, he said.

"It signals that private capital is here, and has the desire and motivation and skill set to pursue larger deals. I wouldn't be surprised to see more activity at the larger end."

Linn Energy this year has banked $2.8 billion in deals, added to $1.3 billion last year. While Linn remains the 800-pound gorilla of 14 upstream master limited partnerships (MLPs), EV Energy Partners and BreitBurn Energy likewise have been active acquirers in the same time frame. Acknowledging that Linn isn't going to be in the hunt for undeveloped properties, Rottino does believe it's hard to beat the company on higher proved developed producing deals due to its tax-advantaged structure as an MLP. "When it comes to mature assets, we have a cost-of-capital advantage that is pretty huge."

This year Linn has acquired assets in Jonah-Pinedale Field and in East Texas, in addition to the Hugoton acquisition, all gas-weighted transactions. But the company remains agnostic to commodity. "Whether it's gas, oil or widgets, we're indifferent," he said. "We bid it as a cash-flow stream."

He said following behind a major like BP in legacy fields in the Hugoton and Jonah deals "were just great opportunities." At current prices, not a lot of value is given to proven undeveloped locations, "but there are clearly years and years of infill drilling opportunities in those fields. If gas prices do rebound in the next five to 10 years, it's going to be a home run for us."

Like ConocoPhillips, WPX Energy, EP Energy and Hess Corp., Marathon Oil has cast off its integrated other half and is operating for the first time as an independent E&P. Before, reserves replacement mattered; now, it's about production growth.

"When we spun off the downstream, that really changed our focus. With the return to the U.S. to participate in the shale plays, we have become part of the independent space where it is about repeatability, managing large-scale drilling and completion operations, and applying technology," said Guidry.

Thirty days prior to announcing the split, Marathon revealed it was buying the Eagle Ford shale position of Hilcorp, planting itself in the heart of the desirable play.

"We recognized that as a pure-play E&P, the game was going to shift, and we would be judged on our ability to grow production. With that in mind, we sought a longer runway in terms of running room of drilling locations," said Guidry.

While the company strategy as a pure-play E&P is to find bolt-on acquisitions for its primary positions in the Eagle Ford, Bakken and Woodford shales, "we're also looking for new opportunities to enter basins, the Permian being at the top of our list."