Over the past 6 months mass panic has gripped the financial markets, resulting in oil and gas stock prices diminishing by an average of 25% and the oil price by 15%, yet the thirst for oil and gas deals has shown little sign of being derailed, with depressed stock prices only serving to whet the appetite of cash rich companies targeting take-overs. The risk aversion that has become seemingly endemic in global markets has produced a large disparity between oil and gas company valuations. The larger ( $1 billion) companies have suffered a drop of 20% over the past 6 months, while small to mid-caps ($200 million to $1 billion) have fared even worse with an average 35% drop. Meanwhile, a small cap exploration company offering little protection in the form of a capitalised balance sheet or proven resources will be counting themselves lucky if they haven’t fallen by over 50%.
Underlying acquisition metrics have changed little during this time as evidenced by deals between major oil companies, whose cash positions mean they are in the advantageous position of not being required to turn to panic sells. The smaller cap companies however, laden with debt and barely existent revenue streams do not have the luxury of time and bargains are being found especially amongst the London AIM market. Encore Oil and Dominion Petroleum have been picked off this quarter for a fraction of their worth at the start of the year and the $42 billion of deals in the upstream sector during Q3 2011 is already looking like it will be surpassed in Q4 2011.
Morgan Inc this week made a major consolidation in the gas transportation business of North America via a $38 billion (including debt) offer to acquire El Paso Corp. El Paso offers a considerable presence within the upstream sector with 137,000 boe/d of production but it is the midstream assets that Kinder Morgan are really after and they have already made known their intention to sell the upstream assets of El Paso. Using the 11.9x EBITDA multiple for the deal and the upstream segments earnings over the first year of 2011, would suggest a rudimentary valuation of close to $12 billion for the upstream assets. This would ignore the fact that the majority of El Paso’s portfolio is composed of gas and that even the undiscounted NPV of the assets falls short of this value. It…
