Entrance attended the Rice Energy Finance Summit (REFS) this week to get a closer look at how the finance world is viewing the effects of oil and gas on the economy and our businesses. Across the board, all the speakers focused particularly on how the “Shale Gas Revolution” is working to change the economy not only of the US, but of the whole world.
Where before the US appeared to be facing an energy shortage and mass imports of fossil fuel from foreign countries, 100 year or more reserves of natural gas, all from within our border, has changed that landscape. Some reports say that the U.S. will reduce imports of non-Canadian oil, perhaps eliminating all Middle Eastern suppliers by 2020.
As production has grown by 18% since 2006, this increase in supply has caused industry changes that are driving more mergers and acquisitions, with M&A onshore investment alone jumping from $14.8 billion in 2002 to upwards of $66 million in 2012. REFS speaker Ralph Eads, of Energy Investment Banking, discussed the valuation of operators during M&A, and according to him, a critical driver of value is the ability to effectively operate rigs.
Lack of data can also reduce the value of an operator during consideration of M&A. Without it, an operator can find itself in the undesirable situation of being under valued, because they can’t prove the worth of their assets. With good data and proven operating skills, an investor can feel more confident about getting the most from a shale play.
Another possible reason for M&A is that the companies that first developed shale don’t always excel at optimizing repeated processes. So sometimes a merger occurs not only for investment purposes, but to incorporate that capability into the company. Other acquisitions are for the purpose of procuring land stakes that better match the profile the company already has.
Attendees of the conference also discussed the growing need for human capital and how M&A sometimes occurs for this purpose as well. A recent blog post covers this issue in more detail.