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Less drilling, more dealing

For an oil and gas company belonging to a very narrow stripe of the industry that’s well capitalized, long-term oriented and opportunistic, this might be a good time to make a deal.

Some industry experts predict 2015 may turn out to be a year of less drilling and more dealing, as low oil and natural gas prices force some companies out of the market and those remaining look to pick up the crumbs.

“There will be a lot of companies looking to get a deal for pennies on the dollar,” said Carl Larry, director of business development, oil and gas, at Frost & Sullivan in Houston, Texas.

Large firms that have the means and “wherewithal” to withstand this wave of low prices are best poised to take advantage of such opportunities.

“We know oil prices will go back up,” Mr. Larry said.

What’s not known is how long they’ll remain down before the eventual rebound.

The opportunities are plentiful, according to Mr. Larry, and “the best deals are going to happen for the large-cap and mid-cap sized companies.”

Mid-caps may look to merge and create “bigger and better companies,” he said, citing the recent announcement by Halliburton that it will fold in Baker Hughes, the Houston-based oilfield service company’s biggest domestic rival.

Related: Texas leads nation in drilling rig losses–again.

The nudge may be low oil and gas prices, but the impetus behind such consolidation is that it’s overdue, Mr. Larry said.

Domestic vulnerabilities may also open up the gates for foreign buyers who aren’t already invested in American oil and gas. This may be a particularly attractive option for Asian companies looking to secure a supply of fuel for export.

Mr. Larry said he’s got a few foreign companies on his schedule in the coming weeks interested in taking a chunk out of the U.S. oil and gas market during this weak period.

A recent, already public example is Spanish company Repsol SA’s pursuit of Canadian oil and gas operator Talisman Energy Inc. Repsol announced in December that it will buy Talisman for $8.3 billion.

Talisman revealed in a public filing on Jan. 21 that it has had trouble unloading its Marcellus mid-stream assets, among others, in the last year. “Throughout this period, the company encountered a challenging environment for attempting to dispose of long-dated and capital intensive assets,” the filing stated.

So is this really a good time to make a deal?

“It is, and it isn’t,” couched Marty Schardt, executive vice president of the American Association of Professional Landmen.

Mr. Schardt’s organization runs the annual North American Prospect Expo, a trade show that promises on-the-floor deal-making between those with oil and gas prospects and those with pocketbooks. Last week, the organization’s plan for its third annual Pittsburgh show was canceled, with Mr. Schardt blaming a low-commodity environment.

“A lot of these guys are really starting to watch their budgets. It was starting to be a real pressure cooker for them,” he said of the show’s expenses.

Nevertheless, NAPE hasn’t cancelled its big summit in Houston in February and Mr. Schardt expects that to be “as big as ever” this year.

“Money is always looking for a bargain,” he said. “I fully anticipate that there will be bargains on the floor in Houston, and those with money will be able to find some good opportunities for them.”

For small operators, hanging onto what they’ve got might be a better move. “It’s probably not a good time for them to unload their assets because valuations are down,” said Lou D’Amico, executive director of the Wexford-based Pennsylvania Independent Oil & Gas Association.

“That being said, there are a lot of the old guard producers, many of them because of pricing (may say), ‘Enough’s enough. I’m ready to retire. I’m not going to ride this out this time.'”

Mr. D’Amico sees the most merger-and-acquisition potential coming from small shale operators in the Marcellus — producers like WPX Energy which announced late last year it would exit the Marcellus and pursue more lucrative opportunities in its portfolio.

Tulsa-based WPX has already sold its northern Pennsylvania acreage and still is looking for a buyer for its holdings in Westmoreland County.

“Companies may say, I can do so much better in Texas or Oklahoma than in Pennsylvania,” Mr. D’Amico said. “We have problems with pipeline capacity and takeaway.” Because of the bottlenecks, Marcellus gas is trading at a disadvantage to the national benchmark, the Henry Hub, set in Louisiana.

The Marcellus is “not a good investment at this time,” he said, “but if you have a long-term view and you have a lot of money, it might make a little bit of sense.”

This article was written by Anya Litvak from Pittsburgh Post-Gazette and was legally licensed through the NewsCred publisher network.

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