“They’re not getting done with the buyers we’re used to….”
With natural gas prices below $3, how do gas buyers get deals done? Year to date, 15 publicly announced, gas-weighted deals—that is, with proved reserves of more than 50% gas—valued at $25 million or more have been done, notes Sylvia Barnes, managing director and head of oil and gas investment banking for KeyBanc Capital Markets.
In the past 12 months, there have been 26 of these deals, she adds.
“They’re not getting done with the buyers we’re used to—the traditional oil and gas companies. Rather we’re seeing foreign entities, trading houses, the big private-equity firms with a contrarian view like an Apollo (Global Management LLC) and Riverstone (Holdings LLC et al.), such as in the $7.15-billion El Paso (Corp. E&P) deal.”
Barnes addressed attendees at a KeyBanc-sponsored industry program in Houston recently. “We are also seeing a lot of deals done where there is an advantage of cost of capital, like a flow-through MLP vehicle.”
These buyers, such as Linn Energy LLC and EV Energy Partners LP, use low-cost equity capital to buy producing properties that require little reinvestment in contrast with traditional, C-corp E&Ps, which must replace and grow production.
“We also draw your attention to how effective these flow-through MLPs are in their hedging strategy. The poster child for that is one of our clients, Linn Energy.” Among the 26 gas-weighted deals industry did for U.S. gas-weighted properties, Linn did 15%. “And every time they make an acquisition, they hedge 100% of the proved reserves for four years—100%. This has given them a strategic advantage.
“So to do deals in this market, you need to do something out of the ordinary. You have to challenge conventional thinking. This is the type of strategic thinking we’re seeing the successful players use to navigate the storm of these commodity markets.”
Amongst MLPs, the average gas-hedging level for 2014 is half that of Linn’s. “Even more interesting is, if you look at the C-corps, you’re down to 4% in 2014.”
Andrew Fletcher, KeyBanc senior marketer, energy derivatives, adds that, in hedging, producers have to be nimble and seize the day. “Be flexible on timing. Opportunities don’t always coincide with the next board meeting. Stick to your plan and don’t second-guess yourself. Failure to execute is a real cost.”
In 2008, when the gas-price strip pushed above $12, gas-weighted deals were at $3.01 per thousand cubic feet equivalent (Mcfe) of proved reserves, Barnes notes. There were 47 publicly announced transactions of at least $25 million in value that year. In 2009, when the strip fell below $4, there were 26 and at an average price of $1.75 per proved Mcfe. To date, the 2012 average is $1.37.
-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at email@example.com.
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