The Rising Influence of Rising Affluence

[DewDiligence]

Shale-Gas M&A Reaches an All-Time High

http://www.ft.com/cms/s/0/914b7fac-cbef-11df-bd28-00144feab49a.html

›By Sheila McNulty in Houston
September 30, 2010

Companies spent a record $21bn on acquisitions in the first half of 2010 to gain access to the US shale gas boom [this excludes the XOM-XTO deal, even though that deal closed in June 2010] in a trend that shows no signs of slowing, according to a new report by Wood Mackenzie.

The investments were up sharply from the $2bn spent in the first half of 2009 and beat the $19.7bn spent in 2008, the energy research group said in the report, to be released on Thursday.

Investments dropped off last year, when the US was in the depths of a financial crisis and oil and gas prices were lower. And while prices are still off their highs of 2008 and the economy has yet to fully recover, those with money to spend are eager to get into what appears to be a long-term growth prospect.

“A resource opportunity of this scale is a game-changer,’’ said Luke Parker, manager of Wood Mackenzie’s M&A research service. “It is something that everyone will want to be involved in.’’

The gas boom has increased projected US supplies at current usage to 100 years, up from 30 years a few years ago. It has been fuelled by a technological breakthrough enabling producers to extract gas viably from shale rock.

The technology, which combines horizontal drilling with hydraulic fracturing of the rock, is expensive and Wood Mackenzie said the high, upfront costs associated with the initial testing and subsequent full-scale development of shale gas resources were in many cases prohibitive.

This is particularly true for companies with high levels of debt and cash constraints, which fits the description of many of the small, independent producers in the US that have been in on the ground floor of the boom.

It is this need for capital that gave rise to the shale gas partnerships, which Wood Mackenzie said underpinned much of the recent merger and acquisition activity.

In May, for example, Temasek, the Singapore state investment fund, and Hopu Investment Management, a Beijing-based group, agreed to buy $600m of convertible preferred stock in Chesapeake Energy. This followed other deals by Chesapeake with Total of France, the UK’s BP and Norway’s Statoil Hydro to help fund development.

Many of the companies forming partnerships were doing so to divert capital towards opening up new shale plays, Wood Mackenzie said, with the latest trend being a shift toward shale oil projects [i.e. the Bakken].

The increased need for financing gives the well-funded majors strong buying opportunities. This year, ExxonMobil completed its $41bn acquisition of XTO Energy and Shell announced a $4.7bn acquisition of East Resources.

Wood Mackenzie did not include the Exxon deal in its acquisition figure.‹