The flurry of activity in unconventional resources during the past three years will likely lead to a growing wave of consolidation in the coming years, according to a panel of merger and acquisition (M&A) experts.

Sylvia Barnes, managing director at KeyBanc Capital Markets, said a series of market factors has encouraged M&A activity in the past and will likely continue to do so in the future.

Commodity prices are a key driver of M&A activity. Strong commodity prices drive liquidity, cash flows, enhance borrowing bases and have major implications for capital expenditures. Record low debt costs have led to ambitious growth plans, both through acquisitions and organic growth.

Record-low debt costs encourage growth, either through acquisitions or organically, she said.

“We’ve seen a lot of money come in an extensive way and there is more to come … but a lot depends on commodity prices,” she said during Hart Energy’s recent Energy Capital Conference. A shortage of new resource plays and a realization of the potential of the existing ones lead to renewed interest in M&A activity. Finally, the cost of developing unconventional resources has created the need for capital resources among smaller players who are keen to form joint ventures to get financing, she said.

KeyBanc says many small-cap energy companies, those with less than $250 million in market capital, are struggling for financing. These companies with a small market cap draw little institutional interest, have little analyst coverage, and have low value for acquisitions and are often thinly traded. KeyBanc has identified a market niche and seeks to serve the companies who fall in that category, Barnes said.

M&A activity peaked in the fourth quarter of 2012, but has slowed since then as the industry faced growing uncertainty about the legality of hydraulic fracturing. Although activity has slowed in the first half of the year, Barnes said she sensed “pent-up demand” among many players.

Other panelists agreed that consolidation is likely; although not everyone agreed on how long the wave would take or what legal form it would take.

“Consolidation is going to happen. It’s going to be a major part of our business for the next five to 10 years,” said R. Danny Campbell, president of Henry Resources LLC.

All major basins should see some consolidations. Yet, the panel was keen to focus on the Permian basin, where well-capitalized majors largely left in the 1980s. Those that stayed behind were usually smaller independents and other larger independents that came in after the shale boom in the U.S. led to a renewed interest in the Permian.

By then, however, many of the majors had exited the region and are looking to come back in. Today, many of the majors have cash on hand, or access to credit, and are willing to pay to get back in.

“They are all fascinated by these resource plays,” said H. Craig Clark, president and chief executive of Wishbone Energy Partners LLC.

The panelists generally agreed that the likely targets would be companies that are cash-constrained and assets-rich. The buyers, meanwhile, will be well-financed companies in search of resource plays. The majors were frequently cited as likely buyers.

“They are all back knocking on the door,” Campbell said. “They are looking for assets and acreage.”

Comments