Unconventional production to remain strong

The potential for energy resources from unconventional sources will likely play an important role for three decades and require more than $2 trillion in capital to fully develop, an industry analyst and financier said.

Bill Marko, managing director of Jefferies & Co. Inc., said the total breaks down to an average of $70 billion in capital needs every year for the next 30 years.

In a recent presentation to the Independent Petroleum Association of America, Marko said the industry has undergone a major transformation since technology allowed producers to “crack the shale code,” and that transformation has also affected the amount of M&A activity, which has generally risen since 2007 as a result.

The large amount of capital required has also transformed the M&A industry, as producers reshuffle capital and assets to get into strategic locations, and as foreign oil companies, major internationals and private equity have purchased assets, operators, or both, to get into the game.

“When all of this started, we asked ourselves, ‘how do we get in the middle of it and make deal flows?’” he said.

Since 2007, more than $500 billion has been raised in North American E&P companies. A large portion of that, about $297 billion, came from asset sales. Traditional debt accounts for $112 billion of that total, while upstream companies have issued an additional $74 billion in equity during the last five years.

As a result of this activity, the North American onshore business is large enough to support at least $100 billion per year. In 2012, the total reached a record activity of $116 billion, about $40 billion of which came from international buyers, based on statistics from IHS Herold. Of the record activity seen in 2012, $41 billion were for deals in Canada and $72 billion were in the U.S.

M&A transactions in unconventional resources have risen dramatically since then. In 2007, the total was about $14 billion, but by 2012 the total rose to $65.5 billion, according to figures from IHS Herold.

There have been some clear global trends emerging during the past five years. In the early days, around 2007 and 2008, U.S. independents took the lead and focused on gas shales. By 2009, with natural gas prices plummeting, there was a major shift to oil shales. In addition, the majors and international oil companies started moving their activity back onshore, Marko said.

By 2011, the capital markets and private equity players stepped into the game, seeking return on an unconventional resource. In the meantime, the percentage of oilfocused deals roses gradually until, by 2012, 84% of all M&A deals were in oil.

“The internationals, majors and private equity are now paying attention to the shales,” he said.

The sharp discrepancy between oil and gas prices has made some fields more profitable than others, and the M&A market is hot in any strategic area. Buyers are keen to get into oil and liquids- rich areas and have limited interest in areas of dry gas, Marko said. Meanwhile, sellers in areas that contain dry gas or costly formations to develop will likely have trouble finding a buyer.

The most profitable areas include the wet Utica, Marcellus (southwest Pennsylvania and West Virginia), wet areas of the Eagle Ford and the Granite Wash. On the other end of the spectrum are predominantly dry gas areas, including dry Eagle Ford, Haynesville, Barnett and Woodford.

“Not surprisingly, liquids- rich plays tend to have higher returns than gas rich plays … The deal flows have clearly become more liquids rich,” he said.

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