Sunday, October 03, 2010

M&A Deals Soar to $21 Billion in Shale Gas Sector in First Half

US shale gas has been a key theme in upstream M&A over recent years. It has the potential to fundamentally alter the supply and demand dynamics of natural gas industry worldwide forever.

According to the latest report by
Wood MacKenzie,  during the first half of 2010, acquisition spend in the sector amounted to $21 billion, equivalent to around one third of global upstream M&A expenditure.  The value of the market has increased with the emergence of shale gas as a world scale source of secure, long-term gas supply.

The investments were up sharply from the $2billion spent in the first half of 2009 and beat the $19.7 billion spent in 2008. 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 says 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 says 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 $600 million 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 with the latest trend being a shift toward shale oil projects.

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 $4.7billion acquisition of East Resources.

While it appears to be a US focused momentum, we believe shale gas may be abundant in many geographies outside US as well but given US' dependency on LNG oil & gas enterprises have been chasing deals in North America so far. We will likely see more deals in Europe and even Far East starting from second half of next year.

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