Energy mergers frenzy takes a pause — temporarily

June 24, 2011

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bankers in the oil patch who got a glimpse of their families of late shouldn’t get used to it. The frenetic pace of M&A in the energy sector, excluding utilities, slowed this year. As unraveling deals like Encana’s C$5.4 billion tie-up with PetroChina suggest, uncertainty over commodity prices is the main culprit. But the global hunger for hydrocarbons means energy bankers won’t be idle for long.

After a robust 2010, the value of announced oil and gas deals has fallen 14 percent to $123 billion year to date, Thomson Reuters data shows. The decline was particularly acute in the United States, where just $50 billion of deals were unveiled, down by 42 percent from a year ago. Rising activity in associated areas, like alternative energy and petrochemicals, softened the blow somewhat.

As Encana’s now-defunct venture with PetroChina seems to attest, interest in once-booming shale gas deposits may be drying up. The hoped-for revival in natural gas prices has remained elusive: they languish at a third their 2008 peak. Where deals have been struck — such as a recent $1.7 billion purchase of two companies operating in the Marcellus by Exxon Mobil — prices per acre have plunged.

All of this lingering uncertainty over gas prices is keeping buyers at bay, while owners are anxious to avoid selling at what they perceive to be low prices. Choppy oil markets in the wake of the Arab Spring uprisings also took their toll.
But the long-term trends that have made energy rainmakers sought-after remain in place. Shale gas may be yesterday’s story. But interest has shifted to oilier fields in Texas, North Dakota and Colorado. As wildcatters develop reserves in these areas, deals like Marathon’s $3.5 billion purchase of Texas shale from KKR and Hilcorp will follow.

The heightened flow of oil from these areas will also increase interest in pipelines. To wit, Southern Union just became the subject of a bidding war between Williams Companies and Energy Transfer Equity. And despite the collapse of the PetroChina deal, emerging economies will continue to scour the world for hydrocarbons. Demand for oil rose by 11 percent in China alone last year, according to BP’s statistical review.

Commodity confusion has taken some of the swagger out of the oil patch’s bankers of late. But they’re likely to be back in their stride before long.

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