APA Apache Corporation

   (FROM THE WALL STREET JOURNAL 12/31/15) 
   By Erin Ailworth 

U.S. oil and gas companies are selling assets and acreage piecemeal as they jockey to survive a downturn in energy prices, and the trend for small transactions looks likely to heat up next year.

Few energy companies have engaged in the large-scale mergers that many industry experts predicted would occur after oil prices plunged a year ago. Instead, they are selling off far-flung or less-valuable drilling leases and other properties to raise cash.

In some cases the same companies are also buying the rights to drill in areas they consider core, and private equity has been bidding for assets.

Bankers and lawyers who work with energy companies say they have seen a pickup in transactions over the past few months, and expect more in 2016 if oil prices remain low.

"There will be a flood of assets hitting the market," said Jim Rice, a partner at Sidley Austin LLP, predicting that such deals could total as much as $20 billion in the first half of next year, double the level in the same period of 2015.

As they focus on drilling only in the best areas, companies are offloading patches of land they acquired during the shale boom, when grabbing as much acreage as possible was a common strategy.

Many of the sales are relatively small: Of the 349 oil-and-gas-related mergers and acquisitions in 2015, 177 have been valued at $500 million or less, according to Dealogic.

EOG Resources Inc. recently spent $368 million to pick up 26,000 net acres adjacent to its holdings in Texas and New Mexico in three separate transactions.

"We're doing a lot of little deals," Bill Thomas, EOG's chief executive, said on a conference call last month. "We've pretty much ruled out any of the bigger M&A possibilities, and mainly, we ruled that out on asset quality."

Last month, Marathon Oil Corp. agreed to sell most of its properties in the Gulf of Mexico to an undisclosed company for $205 million, while Apache Corp. recently sold a its interest in a fertilizer plant in Australia and other assets for roughly $500 million.

There have been some bigger asset-related transactions. Devon Energy Corp. recently agreed to buy a combined 333,000 acres in Oklahoma and Wyoming for $2.5 billion. Even as it announced the acquisition, the company said it has plans to sell some other acreage, as well as pipelines in Canada, for up to $3 billion.

Big corporate mergers have been scarce in part because of the reluctance of companies to borrow to take on a weaker rival, which may come saddled with debt or have promised big payouts to its executives upon a change of control.

One big merger was proposed recently -- but quickly fell apart. Last month, Anadarko Petroleum Corp., one of the largest independent U.S. oil and gas companies, abandoned a bid for Apache Corp. after the smaller company rebuffed itsall-stock offer.

"What's the incentive to sell the company with oil at $40?" asked Leo Mariani, an analyst with RBC Capital Markets. And for potential buyers, he added, the reluctance to spend big "tells us that the industry players don't think the great deals have come yet -- that the downturn hasn't been long enough and bad enough."

In a recent survey of oil-and-gas executives conducted by Ernst & Young LLP, nearly 90% said they expected the market for mergers and acquisitions to heat up in the next year -- but that most deals will be valued under $250 million.

Experts say that interest in properties will run high.

"Competition from other buyers tops the list of challenges facing companies pursuing acquisitions," said Andy Brogan, a partner at Ernst & Young.

Anadarko's chief executive, Al Walker, has repeatedly complained of being outbid for acreage in the Permian, a drilling region in West Texas.

"There, we see the presence of private equity bidding up things beyond what we are prepared to buy it for," Mr. Walker said at a recent industry conference. As for other buying opportunities, he said: "We've not really seen good distressed assets make their way to the market."

(END) Dow Jones Newswires

December 31, 2015 02:47 ET (07:47 GMT)

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