Distressed sellers and operators seeking to take money off the table will put some $20 billion of E&P properties on the market in this and coming months—some pressured to raise money while natural gas and gassy equity prices remain depressed and field service costs remain high; some taking the 2010 capital-gains-tax rate.

“This is good news for people who have capital,” says Scott Richardson, co-founding principal of asset- and corporate-deal marketer RBC Richardson Barr.

Richardson forecasts private-equity houses will be net buyers. “Private equity is thinking, ‘In a $4 gas market, we’re going to buy as much natural gas as we can.’ They’re thinking it will be $6 or $7 in a couple of years.” Meanwhile, privately funded E&Ps will be among the sellers, driven by capital-gains-tax and regulatory fears.

MLPs will continue to be aggressive buyers, as public-capital markets are funding their deals and the high-yield debt market remains wide open. “It’s probably going to be a good time for the MLPs in the next six to eight months. There is a lot of demand for securities that are yielding 7% and 8%.”

Small-cap E&Ps may be net sellers, as plays are increasingly capital intensive. “It’s a tough time to be a small cap, especially with all the private equity that is out there.”

Meanwhile, producers seeking to increase their weighting to oil will be buyers. And, major oil companies will continue to increase their exposure to U.S. and Canadian independents’ natural gas plays.

“They have a lot of capital and they’re looking to invest that money all the way from the Horn River Basin (in British Columbia) down to the Eagle Ford (in South Texas).” While gas prices have fallen, unconventional-gas deal values continue to grow, as major and national oil companies are “so long-term focused, they’re looking at what natural gas prices are going to be 10 or 20 years out.”

To date, 78% of North American unconventional-gas buyers have been international names. “It’s going to continue to be an international game on the buyside of resource plays.”

In terms of capital, “there’s a ton out there right now. I’ve never seen a high-yield market on fire like it is right now. Again, you’re still seeing spreads of 600 to 700 basis points, but your 10-year Treasury is so modest that we’re seeing companies with CCC debt ratings issuing debt for 10%. Investors are looking for any security with any kind of high yield.”

This year, through August, producers issued $25 billion of equity, investment-grade debt and high-yield debt; in all of 2009, $32 billion.

“All this capital is one reason why valuations have been propped up and look pretty good to sellers.”

Meanwhile, other capital sources are reopening to E&P. Commercial lenders have a renewed appetite for lending; mezzanine and second-lien financing is available; and some $30 billion of private equity is at the ready.

Deal making in 2010 may reach $50 billion, Richardson forecasts. “The next three months will probably be the busiest three months of the past 10 years.”

—Nissa Darbonne

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