?Acquisition and divestiture activity, including corporate mergers, will pick up later this year, but buyers with cash are in no hurry, said speakers at IHS Herold’s Pacesetters Energy Conference, held in conjunction with CERA­Week 2009 in Houston. ?“I think people expect the maelstrom to last a little while longer and so they want to wait. One CEO said the other day, ‘Let’s wait until first-quarter results come out,’” said Martin Lovegrove, vice chairman, Standard Chartered Bank, London.


When things are going well, buyers focus on accumulating assets and managements are reluctant to sell their companies, he said. But when conditions are poor as is the case now, buyers focus more on corporate deals.


“We are at a trough now. But there are going to be a lot of people hoping to be taken over, who find out they are not so attractive to buyers.


“The truism is that the buyer looks at tomorrow’s price and the seller looks at yesterday’s price. I think it will take a bit more time for people to get comfortable.”


A few years ago, many E&Ps complained they didn’t have access to enough resources or plays. A&D is a way to remedy that, speakers said.


“This is a fun time for me,” said Robert Estill, vice president of strategic planning and portfolio management for Marathon Oil Co., Houston. “I prefer to take a longer-term view. Whether you think this is a short-term cycle of one year, two years, five years, the opportunities won’t be here that long.


“A lot of companies are too worried internally instead of focusing on external opportunities. It’s a matter of timing. In this environment, companies should have already decided what they want. Are they looking for things to plug a hole, or create balance, or enter a new area? Do they need an anchor asset or an actual corporate opportunity? Are they overweighted here or there?”


Louis Baldwin, chief financial officer for XTO Energy Inc., Fort Worth, contends there is a mismatch between buyers and sellers that is causing S&D gridlock, and not only regarding asset values.


“It’s like The Emperor’s New Clothes. Every company has been saying it has the best internal or organic opportunity set, yet now to make an acquisition it would have to say in effect, ‘We want the opportunities in another company’s assets.’”


What would unlock the logjam in A&D activity? “Cash is king, but I would add that you have to have a vision of what you want to do, and the discipline to do it,” Lovegrove said.


XTO’s Baldwin thinks A&D action in the U.S. will depend on the direction of natural gas prices. The firm foresees a $6 price this year and maybe $8 in 2010. He thinks the shale plays are “a great place to match up companies with acreage and companies with access to credit, so you may see more consolidation, such as we’ve seen already in the Barnett. The big question is, will the majors jump in?”


The resource potential of, and returns in, some shale plays are so large, they are going to be hard for the majors to ignore, he added.


Lovegrove thinks there is an argument that now is the time to strike. “The oil industry’s margins were better at $60 oil than they were at $120,” although the higher multiples paid for upside last year are now declining.


Which peer group is best positioned to buy? Majors and sovereign wealth funds face the biggest challenges to growth, and have the most cash. What they have in common is a longer-term view that extends beyond the current turmoil, speakers said. Rumors abound that one of these types of buyers might make a play for another major or a very large independent.


“From my perspective, this is an opportune time, the appropriate time that deals should be done,” said Sara Akbar, chief executive of Kuwait Energy Co. “I think the activity level will be greater than in 2008. We’ll see consolidation of smaller companies and Canadian companies. And we’ll see some deals in Iraq.”


Bill Christensen, vice president of strategic planning and reservoir exploitation for Calgary-based Pengrowth Energy Trust, agrees that more consolidation has to occur in Canada.


“You need to be of a certain size to thrive, and so, I believe there will be a lot of acquisitions in Canada, especially among smaller companies. Many of them are living on a month-to-month basis on cash flow and cannot access the capital markets.”


Smaller, “tuck-in” acquisitions that can be assimilated quickly will be easier to do in 2009 than ?other types of deals, he said.

Comments