Downturn will spur M&A activity as operators cut spending in ’09

Jan. 5, 2009
What the oil and gas industry didn’t see much of in 2008 was consolidation.

What the oil and gas industry didn’t see much of in 2008 was consolidation. The US economic crisis and falling oil and gas prices will change that in 2009.

The multibillion-dollar merger and acquisition (M&A) deals common during the late 1990s and early 2000s—the last major economic slump—became scarcer once oil and gas prices began steadily to climb in 2002.

M&A activity

Most notable M&A transactions initiated in 2008 in the US involved independents. Among the largest deals:

  • Fort Worth independent XTO Energy Inc. in April snatched up 55,631 net acres of Fayetteville shale leasehold acreage, including producing properties, from Southwestern Energy Co. for $520 million (OGJ Online, Apr. 7, 2008). Later that month XTO acquired producing properties, pipeline, and leasehold acreage from Linn Energy LLC for $600 million (OGJ Online, Apr. 15, 2008).
  • Stone Energy Corp., Lafayette, La., in May acquired and then merged with Bois d’Arc Energy Inc. of Houston in a cash-stock deal valued at $1.65 billion (OGJ Online, May 1, 2008).
  • XTO in May purchased producing properties and undeveloped acreage in the Williston basin Bakken shale from privately held Headington Oil Co. LP of Dallas for $1.85 billion in a cash-stock deal (OGJ Online, May 28, 2008).
  • XTO then made a move in June to acquire privately held Hunt Petroleum Corp., Dallas, for $4.2 billion in a cash-stock deal (OGJ Online, June 10, 2008).
  • Plains Exploration & Production Co. agreed to acquire in July a 20% interest in Chesapeake Energy Corp.’s Jurassic Haynesville shale play leasehold for $1.65 billion in a new joint venture (OGJ Online, July 3, 2008).
  • Quicksilver Resources Inc. entered into agreements with various private parties to acquire Barnett shale assets for $1.3 billion (OGJ Online, July 8, 2008).
  • BP America and Chesapeake Energy established a joint venture in September after signing a letter of intent outlining BP’s payment of $1.9 billion for a 25% interest in Chesapeake’s Fayetteville shale assets (OGJ Online, Sept. 2, 2008).

As the economic crisis in the US continues to limit producers’ abilities to borrow money and extend bank debt into the new year, executives will look to M&A as a way for their companies to survive. And if oil and gas prices remain at $50-60/bbl or below through much of 2009, companies that budgeted projects based on much higher commodity prices may become acquisition targets for larger, financially stronger firms.

Spending plans cut

Many operators are lowering their 2009 capital spending plans, proceeding with caution in an uncertain year.

A company not cutting spending is XTO Energy, which in November set its 2009 development budget at $3.3 billion, compared with the $2.6 billion of spending it planned for 2008. XTO also plans to spend an additional $500 million for midstream systems including pipelines and processing facilities.

The increased budget, XTO said, will “take advantage of organizational efficiencies and falling costs,” which will benefit XTO with a projected 18% growth in production during 2009.