BNP Paribas Fortis North American energy monthly - Virtual Metals

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BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 3 to buy the natural gas business of Crosstex Energy for $266m. The lesson that is being applied everywhere is that takeovers priced between $250m-$500m that subsequently turn out to have been misjudged are unlikely to seriously affect the financial health of a company compared with a mismatched target costing $5bn. Textbook example of rise and decline Then of course there is Chesapeake Energy. Here is a classic example of a company enjoying a meteoric rise – up to the point of almost setting up its own television service promoting the benefits of gas shale – and then being forced to retrench just as quickly as it attempted to reduce its crippling debt. Whereas some investors in Chesapeake have taken exception to the $112m payout (including a one-off $75m bonus) for CEO Aubrey McClendon at a time when Chesapeake’s fortunes have been under attack, McClendon has been tireless in spotting potential weaknesses in the company and plugging them with asset sales and refinancing operations. The company’s most recent divestment occurred in late September with the sale of a 50% stake in its midstream assets in the Barnett Shale in Texas, as well as non-shale midstream assets in the Arkoma, Anadarko, Delaware and Permian Basins. In return for $588m in cash, Chesapeake is injecting these assets into a 50:50 joint venture with Global Infrastructure Partners. But there may be more to Chesapeake than restructuring its assets for a quick cash fix. With a share price currently trading around $27, Chesapeake has a market capitalization of about $17bn. McClendon is currently in the business of talking up gas prices – and the prospects for his own company – when the US economy stages a recovery so his recent forecast that gas will be fetching between $6-$8 MMBtu by next summer should be taken with a grain of salt. If McClendon proves to be correct, however, Chesapeake will have weathered its worst financial crisis since being set up 20 years ago. But as gas prices rise, Chesapeake will become all the more attractive as a takeover opportunity with a price tag of about $25bn. Mention Chesapeake and the name Petrohawk also springs to mind. Over the past five years, this Houston-based independent has absorbed such companies as Wynn-Crosby, Mission Resources and KCS Energy on its path to greatness, but the collapse in gas prices has left it dangerously exposed to predators. By late September, Petrohawk had announced the sale of Permian Basin properties to a privately-owned company for $376m in cash. This asset sale follows on the heels of August’s stock issue that raised almost $600m which was intended to pay down debt and, somewhat optimistically, fund new acquisitions. With a share price of about $23, Petrohawk has a market capitalization of just under $7bn, which is well within the resources of some of the larger oil companies. Large acquisitions But is there something bigger in the offing? There has been constant speculation over the past three years that ExxonMobil would make a bid for BG Group, the UK gas group. So what has changed in the meantime to make a bid more likely now? First of all, ExxonMobil has been sitting on the record profits it earned from the spike in oil prices last year and it desperately needs to make a sound value-for-money acquisition. The attraction of BG Group in the meantime has been enhanced by its participation in one of the largest discoveries of oil ever made in the southern hemisphere. BG has a 30% stake in the Guara discovery in the Santos Basin offshore Brazil and along with field partners Petrobras (45%) and Repsol (25%) is preparing to develop this surprise jackpot. By BG’s own account, the discovery, which was made in June 2008, has since been judged capable of an initial production output of 50,000 b/d and the field has estimated recoverable volumes of up to 2bn barrels of oil equivalent. It is one of the ironies of the modern oil and gas industry that a major discovery which would normally underpin the future prospects of a company for decades may have made BG more vulnerable to a takeover. BG has a current market value of about £36bn ($57bn) and any takeover offer would need to apply at least another £8bn premium to current stock values.
4 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group BG has displayed takeover aspirations of its own but these have been thwarted recently. Just as it was making its Brazilian discovery last year, BG was unveiling a hostile tilt at Origin Energy, the largest coal seam gas producer in Australia. Its unwelcome US$13.1bn cash bid was eventually superseded by an agreement between ConocoPhillips and Origin to form a joint venture for the Australian market. Stock markets traditionally frown on failed bids, judging them to be a sign of weakness that leaves the bidder exposed to takeover itself. To a large extent, BG has been spared that indignity because of the unfolding of the banking crisis and the subsequent unraveling of the North American economy. It may have been lucky to escape ExxonMobil last year, but the chances are growing that BG will be subject to a $70bn takeover bid this autumn. Other targets Other large-scale takeover targets abound in the US, with the prospect that foreign rather than domestic buyers will be calling the shots. Marathon Oil, which produced net income of $3.5bn in 2008, currently has a market capitalization of just $22bn and would provide a useful international presence for companies like the diversified Norwegian energy group StatoilHydro or even the French oil and petrol retailing group Total. Most new waves of M&A activity start tenuously as boards look for signs within their own industrial sector and within the broader economy that the bad times are over. As economic indicators increasingly show that the worst of the recession is behind the US, energy companies are once again wondering whether it is safe to stick their heads above the parapet. They know from past experience that if they are not in a strong enough position to launch a takeover, there will come a point when they find themselves on the receiving end of a bid. It is safe to guess that board meetings of the country’s energy companies over the next three months will display an unusual mixture of financial soul-searching and basic survival instincts.
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