Friday, August 20, 2010

Deal or No Deal?

I read today in the Wall Street Journal that three separate privately owned shale-focused companies up are for sale at the same time.  Chief Oil & Gas, a player in the Marcellus Shale, Talon Oil & Gas, a private equity based company formed in 2007 with mostly Texas acreage, and Anschutz Exploration, which has interests in the Marcellus and Bakken Shales, among other assets, are all seeking buyers, according to WSJ sources. (also in Forbes)

Tho themes run through these potential transactions.  First, size. It is becoming clear that for producers to successfully maintain a shale drilling program the companies need to be of substantial size and have good access to the capital markets, both for debt and equity.  The history of the domestic natural gas industry is that small scrappy companies developed finds and larger ones came in behind, either buying acreage or further validating the play.  It appears that there is little room left at the shale table for the little guys (not that any of the above mentioned companies are "little guys").

Second, having  private ownership, the sales are also probably motivated by the potential change in capital gains tax rates.  If Congress allows the tax cuts passed earlier in the decade to expire or modifies them upwards, a selling entity could be looking at lower net proceeds. It won't be as bad as paying ordinary income tax, but every dollar of tax literally is money in the bank. If this is the motive, the sellers better get on it if they hope to close a deal by December 31.

Talon is unlike the others because of its private equity ownership. Three years would be an appropriate time to exit an investment, but it surprises me a little that the financial sponsor isn't choosing a better price environment.  Generally, PE firms are less motivated by tax issues than individual sellers.

At the same time, while perusing an SEC filing, I noted that Denbury Resources is having trouble unloading Haynesville Shale acreage it acquired when it purchased Encore Acquisition Company in March 2010.  The company disclosed that it attempted to sell the acreage earlier in the year but has not had any "acceptable offers."  Denbury plans to "repackage and remarket these assets in the near future."

I suspect the taste for "oilier" plays (or at least wetter ones) will be stronger than that for the dry gas in the Haynesville Shale.  I will be interested to see if there are any takers when Denbury takes the acreage back to market.

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