US M&A boom could mean drilling boom in Rocky Mountains and Permian basin
By OGJ editors
HOUSTON, June 22 -- Large independents have actively bought smaller growth-oriented peers as well as assets from the integrated majors during the last 3 months.
The recent transactions are expected to prove very bullish for future drilling activity. Two attractive M&A regions are the Rocky Mountains and the Permian basin.
"Both are key growth areas, especially for natural gas," said Wayne Andrews, a Houston-based analyst for the St. Petersburg, Fla.-based Raymond James & Associates Inc. "In the Permian basin of west Texas and southeastern New Mexico, the top 10 transactions in [year-to-date] 2004 totaled over $2.2 billion. They were predominantly property deals rather than corporate deals, with integrated majors generally being the sellers."
"From the standpoint of the oil service sector, this trend represents a clear opportunity to capitalize on a meaningful increase in domestic drilling activity. In short, it is the best of both worlds for E&P and oil service investors," Andrews said.
The US offers very few areas with "truly outstanding potential for long-term growth," he said. The Rockies represent one such area, particularly coalbed methane production in Colorado and Wyoming.
"While the Permian basin is a more mature area, new well completion technology is revitalizing gas production, and high oil prices are making workovers and exploitation projects more attractive. The basin has a massive inventory of drilling prospects that growth-hungry E&Ps can turn into a highly profitable production stream," Andrews said.
Free cash flow
Recent M&A activity represents a continuation of the majors' ongoing divestiture of maturing US and Canadian assets. Meanwhile, high commodity prices are generating free cash flow for large independents that is above and beyond their capital spending plans.
"While debt repayment and stock buyback are sensible options, most E&P balance sheets are already in good shape, and the core competency of these companies is reinvesting in future growth through the drillbit.
"The major challenge many large-cap E&Ps face is a dearth of drilling prospects, particularly in areas with long-term growth potential. As a result, acquiring mid- and small-cap peers, or assets from the majors, is becoming an increasingly popular means for large-caps to enhance their growth outlook for the next 5-10 years," Andrews said.
Drilling activity
"Whether in the Rockies or the Permian, a critical factor in making an acquisition succeed is for the acquirer to immediately boost drilling activity on the new properties," Andrews said.
ExxonMobil Corp. and Apache Corp., Houston, announced that Apache agreed to pay $385 million for interest in part of ExxonMobil's stake in mature producing oil and gas fields in the US and Canada.
In addition, the two companies agreed to jointly explore for deep natural gas on more than 800,000 acres of Apache properties, both onshore and off Louisiana. ExxonMobil agreed to transfer part interest in 28 producing oil and gas fields in West Texas and New Mexico to Apache (OGJ Online, May 24, 2004).
"The deal represents a new paradigm of collaboration between majors and independents," Andrews said of the ExxonMobil-Apache announcement.
Independents consistently reinvest 70% or more of their cash flows on their US properties, he said. An RJA survey of its coverage universe suggests that 2004 growth in total capital spending compared with 2003 should be up 15% and that drilling spending will be up 20% or more.
"Higher cap-ex budgets stimulate growing demand for rigs, which provides service firms with an opportunity to push through moderate price hikes without jeopardizing the level of drilling activity," Andrews said.