Is Energy Merger-and-Acquisition Activity Set to Explode?


Last year was a record year for mergers and acquisitions within the oil and gas industry. So far, 2013 is off to a fairly decent start, though we're off from the torrid pace seen at the end of 2012. Instead, we're seeing complex deals and joint ventures taking center stage. Is this a sign of things to come, or are we primed for an M&A boom?

Let's make a deal
So far this year, according to consulting firm PricewaterhouseCoopers, U.S.-based companies have spent $27 billion on M&A, which is slightly ahead of last year's pace of $25.7 deals in the first quarter. Still, we've seen a massive 52% drop-off from the fourth quarter of last year, as many companies sold out before we went over the fiscal cliff. We also haven't seen too many headline-making deals.

One of the largest deals this year, and the one that could make an interesting new trend had LINN Energy combine with its affiliate LinnCo to purchaseBerry Petroleum in an all-stock deal valued at $4.3 billion. The deal was unique because LINN is structured like an MLP while Berry is a C-Corp. To get the deal done, LINN used its newly public LinnCo, which is a C-Corp and whose only assets are units of LINN, to merge with Berry. Once the merger closes, LINN will trade its units to LinnCo for Berry's operating assets. LINN believes this new structure could be the new deal standard as it looks to continue to consolidate mature oil and gas assets in the United States.

Rich foreign buyers
The most interested buyers right now are foreign buyers. They represent one of the few buyers with the financial resources and the desire to acquire assets at a premium. That's one reason one of the quarter's larger deals saw Chesapeake Energy enter into a $1.02 billion joint venture agreement with China's Sinopec. The deal was for a 50% interest in 850,000 of Chesapeake's acres in the Mississippi Lime. This deal is one of the many in recent years that saw foreign oil companies purchase oil and gas assets in the United States. Because of the capital required to explore shale resources, we're seeing more companies explore foreign joint ventures as many U.S.-based producers have seen their own capital wells run dry.

Looking ahead, we'll see similar activity centered on shale ventures, with the Utica potentially seeing the most activity. Chesapeake has already made it known that it would like to unload around 100,000 of its acres in the Utica. Meanwhile, Devon Energy is looking to completely exit from the Utica. Devon has already packaged a portion of its Utica acreage, along with four other emerging plays, into a joint venture package with Sinopec. While these two energy giants are exiting the Utica, it still appears to be a top-tier play; it's just not the oil-levered play those two were hoping it would become.

While those two are looking to unload assets, other companies like LINN are looking to continue to acquire. The difference here is that LINN is looking for mature, cash-flowing assets while those being offered by Devon and Chesapeake still need to be developed. LINN sees a robust market for mature assets, and on the company's recent conference call, it noted that while things have been slow, it appears that activity is about to pick up. Specifically, in terms of M&A activity, CEO Mark Ellis point out:

We've seen it pick up. Actually on the asset side, I think we mentioned in the last call it kind of got off to a slow start. We still felt like it would be a pretty robust year and that we're actually starting to see that come to fruition where there is a number of things out there right now, and some pretty sizable things as well, that are in the marketplace, which is encouraging. And as you know, we continue to monitor the C-Corp side and look pretty hard there. So we think it's a pretty good market.

It would appear that we'll see a fair amount of M&A activity over the next few months. Not only will foreign buyers probably pick up additional shale assets, but we'll probably also see a couple of large asset sales or mergers announced as the weather continues to heat up. While it's useless to speculate as to what deals will get done, it's still important to watch overall deal flow. However, with so many organic growth opportunities for energy companies these days, we probably won't see too many headline-making, transformational mergers take place.

Chesapeake has been a busy deal maker over the past few years, as it's been jettisoning assets in order to pay down debt while funding its drilling program. This transition is one reasons energy investors would be hard-pressed to find another company trading at a deeper discount than Chesapeake Energy. Its share price depreciated after negative news surfaced concerning the company's management and spiraling debt picture. While the debt issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy.

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Fool contributor Matt DiLallo owns shares of Linn Energy and LinnCo. The Motley Fool owns shares of Devon Energy and has options on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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