2010 energy M&A outlook
After a dismal open at the start of the year, the M&A market finally began showing signs of life again as we moved toward the end of 2009. At the time this column goes to press, 22 deals had been announced in 4Q09, representing a total value of $15.3 billion, compared to $4.8 billion in the US for the third quarter.
So far, the first six weeks of the fourth quarter represents 33% of 2009's total US M&A value, and indications recently reported in the Energy Information Administration's Short-Term Energy Outlook show support for continued deal flow in 2010.
This year, M&A activity, or lack thereof, was hindered by the high volatility of commodity prices. The immense uncertainty surrounding pricing had a demoralizing effect on the market for much of the year, and despite the need for capital, sellers were slow coming to market—nobody wanted to sell at the low. Lower volatility in oil prices in recent months can be largely credited with bringing sellers back to the market.
The market's expectations for oil prices in January 2009 ranged between $39 and $113 per barrel, implying volatility of 82%. The deteriorating market confidence at the end of 2008, in part due to pricing uncertainty, resulted in both buyers and sellers sitting on the sidelines. However, as the market managed to sustain oil prices above $50 per barrel, the industry gradually became more comfortable with asset valuations, as demonstrated by the acceleration of deal flow throughout the year.
In fact, oil-weighted transactions dominated M&A in 2009, accounting for nearly 55% of total proved reserves transacted in the US at the time of publishing. This is a dramatic shift from the previous three years, when gas-weighted transactions accounted for nearly 72% of total US proved reserves changing hands, and current indications suggest this trend is likely to continue.
In November, the EIA published its commodity pricing expectations for 2010, and its analysis indicates pricing volatility for oil nearly half that of this time last year. The EIA reported market expectations for January 2010 crude oil prices ranging between $61 and $104 per barrel, implying 41% volatility with a forecast for the year estimated at $81 per barrel. At this level, pricing risk becomes more manageable, and less uncertainty should support continued deal flow in the coming months.
By contrast, the outlook for natural gas is less optimistic. The EIA estimates in December 2009 gas prices to range between $3.76 and $6.28, suggesting 60% volatility; this almost mirrors last year's volatility of 62%. However, the EIA expects the decrease in drilling activity and the precipitous decline rates of recently drilled gas wells to support an average of $5 per Mcf for 2010.
It's not quite what the industry would prefer, but it is favorable to the $4.01 per Mcf we have averaged so far this year.
Although it is likely that the market for oil-weighted assets will remain strong in the coming months, there should continue to be sufficient opportunity for buyers of natural gas attempting to take advantage of value-priced assets in a climate of high pricing volatility.
We are still quite far off from the deal flow we enjoyed in recent years, and while the economy is beginning to show signs of recovery, the road to a thriving economy still appears long. However, market indicators at least suggest a move in the right direction, and less volatility in commodity prices is a critical component of sustained M&A activity as we begin a new year. OGFJ
About the author
Jason Reimbold is a vice president in the Houston office of The Rodman Energy Group where his focus is on 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].
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