Scott Richardson, a co-founding principal of RBC Richardson Barr, has seen a lot in a 25-year career as an energy investment banker. But he's never seen a market like this, with dealmaking veering from busy to quiet to busy again and capital markets swinging open to closed to open. "It's been a schizophrenic market," he told an industry luncheon.
What hasn't changed has been the excitement over shale, the sedimentary rock that holds pockets of natural gas and oil that can be extracted through hydraulic fracturing, or fracking. It's led to some pretty big deals with some pretty big prices, most notably BHP Billiton Ltd.'s purchase of Petrohawk Energy Corp. for $15 billion -- a 65% premium.
The majors are bolstering their positions. Exxon Mobil Corp. purchased Marcellus Shale explorers TWP Inc. and affiliate Phillips Resources Inc. for $1.7 billion; ConocoPhillips Co. bought 46,000 net acres of leasehold in the Niobrara Shale from Lario Oil & Gas Co. for an undisclosed sum; and Chevron Corp. bought properties in the Marcellus from Enerplus Corp., Chief Oil & Gas LLC and Tug Hill Inc. for $1.8 billion on top of its $4.3 billion purchase of Atlas Energy Inc.
In the third quarter, shale plays represented almost half the total oil and gas deal value as companies sought to gain "technology know-how and diversify service offerings," says Rick Roberge, a principal in PricewaterhouseCoopers LLP's energy M&A practice.
Following the Chinese, the Japanese are piling in. Itochu Corp. is participating in the $7.2 billion buyout of Samson Investment Co. with Kohlberg Kravis Roberts & Co. LP, Natural Gas Partners and Crestview Partners, while Inpex Corp. and JGC Corp. are buying 40% of Nexen Inc.'s shale properties in British Columbia for $700 million. And Mitsui & Co. Ltd., which was burned in the BP plc oil spill in the Gulf of Mexico, is thought to be Chesapeake Energy Corp.'s $3.4 billion sugar daddy in Ohio's Utica Shale after buying stakes in properties in South Texas' Eagle Ford Shale from SM Energy Co. in June for $750 million and in the Pennsylvania portion of the Marcellus Shale from Anadarko Petroleum Corp. last year for $1.4 billion.
The U.S. is producing so much oil and gas that it should become a net petroleum product exporter this year -- the first time in 60 years. Shale gas, which made up 27% of U.S. natural gas production last year, is now at 34% and expected to reach 43% by 2015 and 60% by 2035, according to IHS Inc. And while it remains the early days of pulling oil out of shale, estimates suggest there might be as much as 20 billion barrels of recoverable tight oil just in the U.S. "That is like adding 1-1/2 brand-new Alaska North Slopes, without having to go to work in the Arctic north and without having to build a huge new pipeline," Daniel Yergin writes in his new book, "The Quest: Energy, Security, and the Remaking of the Modern World." "Such reserves could potentially be reaching two million barrels per day of additional production in the U.S. by 2020 that was not even anticipated even half a decade ago."
The advent of shale is creating a boom, from the equipment and technology needed to get oil and gas out of the ground to ancillary services -- water, chemicals, housing and people -- to storage, processing and transportation. That drove Superior Energy Services Inc.'s $2.7 billion deal for Complete Production Services Inc., Kinder Morgan Inc.'s $37.8 billion acquisition of El Paso Corp. and Crestview-backed Select Energy Services' rollup of water companies.
While private equity has become entrenched in shale, some firms are instead investing in conventional natural gas, such as TPG Capital's $1 billion commitment to Maverick American Natural Gas LLC. Denham Capital Management LLP, whose Ursa Resources Group LLC sold its properties in the Bakken Shale, is now backing Ursa management's forays into conventional oil and natural gas.
Maybe their investments have reached the end of their life cycle. Maybe they fear stronger regulation after cries from environmentalists. Or maybe they're just getting out while the getting's good.