What is Fueling Recent Energy Mergers? Shale Gas, Silly!
There has been a lot of activity within the merger and acquisition arena, especially withing the oil and gas markets. What has sparked all this major activity? Seems to be shale gas is the reason. The U.S. has seen major shale plays in the focus of the energy idustry, which as a result, is causing big energy companies to react. SL Advisers explains why the companies are reacting in the form of M&A opportunities.
The Financial Times notes in an article Wednesday how M&A activity in the shale gas arena reached almost $50BN during the third quarter, a 135% jump from a year ago. Some deals were large and notable, such as Kinder Morgan’s (KMP) purchase of El Paso. Others took place out of the spotlight, but what is clearly taking place is a growing acknowledgment by the major energy companies that domestic natural gas in the U.S. will represent an increasingly important source of energy production.
It’s here in the U.S., it’s cleaner than other fossil fuels (though global warming is yesterday’s story) and it’s persistently cheap. The very success of so many E&P companies in drilling for natural gas has depressed its price, helping consumers but hurting profitability. WhenPetrohawk (HK) sold its business to BHP Billiton it confirmed CEO Floyd Wilson’s oft-stated belief that the assets Petrohawk owned better belonged within a larger company with a lower cost of capital. That statement really is the key to the natural gas story. In a time of abundant and cheap natural gas, the company that has the lowest overall cost structure (including the cost of financing the necessarycapex) will win.
Shale plays are very appealing for exploration and production companies. Investors are also excited and interested in shale play investments. If natural gas remains cheap, and shale continues to be prosperous, this could be a long term trend.
Quotes taken from report by SL Advisers, Read the entire article here.
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