Emerging M&A opportunities

Record high prices for natural gas made conventional Gulf Coast production an attractive target for operators in recent years, but the extreme downward pressure on the price of gas in 2009 has prompted companies to look elsewhere for their prize.

The re-opening of the capital markets in the second half of this year provided a much-needed lifeline for public E&P companies, but clearly the companies now winning investor support are not those focused on conventional gas—rather it is those pursuing oil and unconventional gas that are most favored by the market.

Not surprisingly, supportive oil prices (around $75/bbl at this writing) have attracted investor attention as demonstrated by the market response to Callon Petroleum's recent onshore acquisition. The operator enjoyed a near 40% surge in its stock price upon news of its entry into the Permian basin through the acquisition of ExL's Wolfberry assets in early September. This shift in the company's focus was motivated by the need to diversify its asset base which, until now, has been mainly offshore production in the Gulf of Mexico.

However, Permian players are not the only ones gaining market interest. Larger cap, gas-focused companies have also been successful at enticing investor support by pursuing the impressive IRRs and repeatable exploration success that are characteristic of the shale plays. All of this is despite 2009's low average price of $3.89 for natural gas the lowest price since 2002 when gas averaged $3.37 per MMbtu.

In addition to E&Ps exiting the region to focus on more investor-friendly pursuits, some operators could leave the area due to financial distress. Companies that became highly levered and/or purchased Gulf Coast assets at the height of property valuations last year are finding themselves in a position where a divestment of assets is almost inevitable. A recent example is Edge Petroleum's asset sale to Public Gas Partners. The deal was announced on October 2 with total consideration estimated at $191 million for assets that were mostly in the South Texas, Gulf Coast region.

The Edge deal implied valuation metrics of approximately $5,596/Mcfed and $1.48/Mcfe for proved reserves representing a valuation near to the 2009 average (at the time of publishing) of $6,464/Mcfed and $1.65/Mcfe for onshore Gulf Coast assets. This is an attractive price point when compared to metrics in the more fashionable plays this year that have been approaching $10,000/Mcfed and $2.00/Mcfe of proved reserves.

Of greater interest regarding the announcement of Edge Petroleum's sale is the fact that the company's lenders are taking a substantial write-down on the credit. As stated in the October press release, the company's outstanding debt was approximately $226.5 million representing a loss of value of more than $35 million. Now, this does not necessarily mean it's open season at fire sale prices for Gulf Coast assets, but it does demonstrate a creditor's acceptance of current market value.

Regardless of the reason, whether investor driven or financial distress, a significant number of companies could be exiting the region, providing a target-rich environment for long-term Gulf Coast players.

However, implementing a Gulf Coast acquisition plan is not a likely strategy for just any company even though the price seems right. The characteristics of much coastal production require a significant effort just to maintain PDP, and successful development of untapped reserves requires further expertise still. Economically successful operations would generally require highly technical and experienced Gulf Coast operators.

Candidates that can take advantage of these forthcoming opportunities are apt to be private E&Ps with a long history in the region that have the ability to execute a buy and hold strategy until gas prices recover. This group may also include a number of private equity-backed players provided their hold period is sufficiently long. Ultimately, Gulf Coast acquisitions are an unlikely strategy for management teams that are not already experts in the region.

Although the price of natural gas has gradually improved in recent weeks, anything short of a sustained price spike is unlikely to slow the exodus from the region, and this should result in ample M&A opportunities for strategic buyers of onshore Gulf Coast assets.

About the author

Jason Reimbold is a vice president in the Houston office of The Rodman Energy Group where his focus is A&D advisory. Rodman & Renshaw LLC (Member FINRA, SIPC) is a full-service investment bank with offices in New York, Houston, and Calgary. He can be reached at [email protected].

More Oil & Gas Finacial Journal Current Issue Articles
More Oil & Gas Financial Journal Archives Issue Articles