PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
If there was any question whether the recent drop in oil prices would put a crimp in mergers and acquisitions in the energy sector, there was a clear answer on Aug. 28: Three deals were announced that day, ranging from small to medium to Texas-size.
In the biggest, Houston's Kinder Morgan (KMI), which operates 43,000 miles of oil and gas pipeline in North America, agreed to be taken private by a group led by the company's founder, Richard Kinder, in a deal valued at $22 billion. Separately, Western Refining (WNR) and Giant Industries (GI), both refining and marketing companies, said they would merge in a $1.5 billion deal. And, at the other end of the spectrum, private-equity firm Mason Wells said it would acquire Oilgear (OLGR), a hydraulic pump and valve maker, for about $31 million, a 42% premium over the company's closing stock price on Aug. 25.
The deals come as M&A activity in the energy sector is already at record levels. Companies in the industry are scooping up rivals and partners, betting on a bright future. In addition, private-equity firms, which have raised billions in recent years, see plenty of opportunity to use their capital to seek outsize returns. "There's going to be increased activity," says Bob Gray, a partner at the law firm Mayer, Brown, Rowe & Maw, which advises energy companies on mergers and acquisitions.
NO LETUP IN DEALS. So far this year, there have been 1,625 M&A deals in the energy and power industry, according to Thomson Financial. That's up 9.4% from the same period last year and the highest number since Thomson began tracking such statistics 30 years ago. The total value of the deals so far this year is $355.5 billion, up 56.7% from the same period last year, and again the highest level Thomson has recorded.
Earlier this year, experts pointed out that the deal activity was linked to higher oil prices, with a flurry of acquisitions as oil surged from $60 to nearly $80 a barrel. Yet M&A has continued apace even as oil prices have slipped in recent weeks (see BusinessWeek.com, 8/23/06, "The Contrarian Case for $50 Oil"). One reason may be that investors are still valuing oil companies as if the price of oil were even lower than it is now. Morgan Stanley said in a research note on Aug. 11 that integrated oil stocks are trading at prices that assume oil can be sold for about $45 per barrel. (Light sweet crude for October delivery traded at $70.50 on the New York Mercantile Exchange on Aug. 28.)
Dealmakers are betting that the prospects for energy companies are bright over the long term, even if there's a temporary pullback in prices. Paul Foster, chief executive of Western Refining, said in a conference call with investors the day of his company's merger with Giant Industries: "We believe the timing is right." The deal, which the companies expect to close in the fourth quarter of this year, subject to regulatory approval, will make Western the fourth-largest publicly traded independent refiner and marketer in the U.S. It will give Western 84% more refining capacity than it has now, amounting to about 216,000 barrels of oil a day.
UNDERVALUATION FACTOR. One reason Richard Kinder is leading the effort to take the company he founded private is that he thinks public investors are undervaluing the pipeline operator. Kinder is part of an investor group that includes Goldman Sachs Capital Partners (GS), American International Group (AIG), the Carlyle Group, and Riverstone Holdings. The group in May proposed acquiring the company for $100 per share. Kinder and his backers boosted the cash offer to $107.50 a share, winning approval from the Kinder Morgan board. The price values the company's equity at $15 billion, and another $7 billion in debt will be assumed by the acquiring group.
Other energy companies have made it plain in recent months that they're on the hunt for acquisitions. Bruce Smith, chief executive of San Antonio–based refiner and marketer Tesoro (TSO) said in a conference call Aug. 3 that he's been thinking about ways to make his company's earnings less dependent on the Golden Eagle refinery near Martinez, Calif. "We've been actively looking at a lot of things, and our goal would still be to be able to see some external growth at some period of time at the right price," Smith said. He added that he's keeping his eyes on the global market; while there's not a lot in Asia that he could do, his company does buy crude there.
In another example, the San Antonio refiner Valero Energy (VLO) is interested in making acquisitions in Europe, the company's executives said in an Aug. 1 conference call. (They didn't provide details, citing confidentiality agreements.)
BARGAINS TO BE HAD. Meanwhile, LUKOIL (LKON) has said in recent months that it's planning to buy U.S. refining assets and gas station outlets, according to press reports. This is an ongoing effort: The Russian oil giant bought 1,300 Getty gas stations in America for $71 million in 2000.
Lower oil prices may not hinder mergers and acquisitions; rather they may spark more dealmaking. "You'll probably see more deals in a correction," says Evan Smith, co-portfolio manager of the Texas-based U.S. Global Investors. He pointed out that stock prices would come down in a slowing economic environment, making companies cheaper to buy. Meanwhile, if oil prices were to fall to around $60 per barrel, most companies would continue generating tremendous cash flow from their production, he says. In any event, U.S. Global Investors forecasts that oil will continue to be at least in the range of $65 to $75 in the near term and likely could rise to $80 to $85 over the next year or two.
Other major recent deals include Anadarko Petroleum's plans, announced in June, to pay $21.1 billion in cash for rivals Kerr-McGee of Oklahoma City and Western Gas Resources of Denver. Anadarko (APC) is aiming to position itself as a leader in the deepwater Gulf of Mexico and the Rockies. More recently, Occidental Petroleum (OXY), on Aug. 7, announced the acquisition of oil and gas assets from Plains Exploration & Production for $865 million, in a deal intended to expand the Los Angeles–based company's existing operations in California and the Permian Basin in West Texas.
PRIVATE EQUITY INTEREST. Oklahoma City's Devon Energy (DVN), which produces natural gas in Texas, bought Chief Holdings for $2.2 billion in cash during recent months. News also hit in December that Houston's ConocoPhillips (COP) agreed to buy its neighbor Burlington Resources (BR) for $35.6 billion, which has most of its reserves in North America.
One reason why experts don't expect M&A in the energy sector to slow down is the growing resources of private equity firms. Greg Pollard, the transactions lead at Ernst & Young's Energy Center, is forecasting more mergers and acquisitions in every sector of the industry, particularly in oil services and exploration and production. Why? Private-equity firms focused on the energy sector raised $8 billion during the first half of 2006, according to Ernst & Young.
Justin Perucki, an analyst at the investment research firm Morningstar (MORN), agrees that more M&A activity is on the way, but he's leery of the premium some acquirers are paying. "The deals are there, but the prices that people are asking are pretty robust," he says. "For a company to create value, they have to put faith in their ability to increase production from those fields."
Ryst is a reporter for BusinessWeek.com in New York
READER COMMENTS
BW MALL
SPONSORED LINKS
VMware Fusion 3
The Best Way to Run Windows on Your Mac, Only $79.99
Printer-Friendly Version