Merger mania: Corporate-level deals in flux in energy M&A space

Jason Reimbold
The Rodman Energy Group

Activity in the M&A market has certainly been accelerating in recent months with more than 65 transactions announced totaling a reported aggregate value of approximately $20.3 billion since January. This is a far cry from the near M&A freeze for the same time period last year when only 28 deals were announced at a combined value of $549.5 million. However, it's almost meaningless to make the comparison. Market conditions are quite different than the same time last year—thankfully!

The Exxon/XTO Energy (NYSE: XOM/NYSE: XTO) deal announced in December 2009 really set the tone for the considerable deal flow we're experiencing today. Not only did the transaction lend additional support to unconventional gas plays, but it also set the stage for corporate-level deals.

So far this year, a total of seven reported corporate-level transactions have accounted for nearly 38% of total M&A transaction value, or $7.8 billion (at the time of publishing).

What is fueling this M&A frenzy?

The oil/gas price ratio is undoubtedly a key factor driving M&A activity as gas-focused companies "adjust fire" to target oilier, or more liquids-rich, production as we saw in the recent acquisition of the oil-focused Arena Resources (NYSE: ARD) by gas producer SandRidge (NYSE: SD).

The $1.53 billion transaction implied a notable metric of $177,633/boe for daily production (evidently, these assets must possess tremendous upside) and $21.80/boe of proved reserves. Significantly, Arena's oil/gas mix of reserves was 86%/14% thus making Arena a prime target for any gas-focused company looking to diversify its asset holdings.

However, the oil/gas pricing ratio is not the only driver of market consolidation. We also see "strategic alternatives" being executed by several distressed entities as a result of capital constraints.

In December, just after the Exxon/XTO announcement, Alta Mesa Holdings LP agreed to acquire the financially distressed Austin Chalk/Gulf Coast operator Meridian Resource Co. (NYSE: TMR) for $147M of which $102.5M was TMR's working capital deficit. Soon thereafter, in February, we saw the announcement of an investor group led by Scotia Waterous acquiring Powder River Basin operator Pinnacle Gas Resource (NasdaqGM: PINN) in a private transaction valued at $34.6M ($20.3M working capital deficit) in response to severe capital constraints.

One month later, CCMP Capital Advisors announced its intent to acquire a 37% stake in Chaparral Energy after the company's failed deal with United Refining at the end of last year. CCMP acquired their stake for $767M, which included $447.3M of liabilities and long-term debt.

Finally, and a bit of a surprise (which is to say almost no pre-deal chatter), the Apache/Mariner (NYSE: APA/NYSE: ME) announcement demonstrates that solid companies with strong balance sheets are willing to make long-term strategic investments in the Gulf of Mexico. The Mariner deal fetched $8,393/Mcfe/d—not bad for offshore production, but it should be noted that the oil/gas reserve mix was nearly 50/50.

So, here we are nearly half way through 2010, and we're seeing deals taking place in the oil plays, the unconventional oil and gas plays, and now, we're even seeing transactions occur offshore. I wouldn't be surprised if we even witness the consummation of a few value-priced Gulf Coast conventional deals in the near-term.

In summary, everyone's a target. I know of at least a half dozen sub-billion dollar companies in talks, or at least exploring merger opportunities right now. Of course, they shall go nameless, but I'm looking forward to continued deal flow ahead.

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 and Houston. He can be reached at [email protected].

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