Data Rooms Are In a M/A/D Mood

A New Marketplace Emerges

Besides their usual obsession with the predicted temperature next week in Boston or wherever, the NYMEX oil and gas futures traders now are fretting about far more weighty matters, e.g., oil embargoes and the ever-changing fuse length on the powder keg known as the Middle East.

And there's that pesky on-again/off-again coup against the president of big-time oil exporter Venezuela, with its gaggle of disgruntled oil workers.

But let a cheater or two from OPEC et al decide to grab a bigger piece of the quota pie, and a "war premium" and more can be lopped off the price of crude essentially overnight.

Unrelenting uncertainty permeates the industry, yet the oil and gas finders continually rise to the challenge to create value via myriad avenues.

One of the more popular methods lately centers on the mergers, acquisitions and divestitures (M/A/D) arena.

Buy low, sell high is the mantra — but there are no guarantees.

"There were actually two markets in 2001," said Robbin Jones, director of A&D solutions at IndigoPool.com. "The early one was robust, and then it slowed down.

"Buyers later in the year didn't believe the forward price curve, so we had a valuation gap between buyers and sellers."

Now that commodity prices have come off the lofty levels reached last year, Jones sees the market heating up.

"Companies that weren't willing to sell assets because of the great cash flow they were getting are now willing to sell, thinking they'll get a fair price," he said. "And they want to put the money into other assets that will give a better return."

Fueling the Trend

One way to contend with the roller-coaster price scenario when contemplating M/A/D activity is to ignore it.

"You have to look through the volatility, pick a long-term price case and stick with it," said Aubrey McClendon, chairman and CEO of Chesapeake Energy, which has a voracious appetite for M/A/D.

The company's latest foray into this arena is the purchase of its Oklahoma City neighbor, Canaan Energy, which is expected to be completed in the third quarter of this year.

Chesapeake's penchant for buying companies and assets is aptly reflected by its track record of $1.6 billion in acquisitions, or about two-thirds of its asset base. These all were placed on the books since 1998 when it began reinventing itself to focus on one commodity (natural gas), and one area (the Mid-Continent, where it currently is the second largest gas producer, according to McClendon).

He noted several Wall Street-fueled trends in the industry's ongoing consolidation:

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Besides their usual obsession with the predicted temperature next week in Boston or wherever, the NYMEX oil and gas futures traders now are fretting about far more weighty matters, e.g., oil embargoes and the ever-changing fuse length on the powder keg known as the Middle East.

And there's that pesky on-again/off-again coup against the president of big-time oil exporter Venezuela, with its gaggle of disgruntled oil workers.

But let a cheater or two from OPEC et al decide to grab a bigger piece of the quota pie, and a "war premium" and more can be lopped off the price of crude essentially overnight.

Unrelenting uncertainty permeates the industry, yet the oil and gas finders continually rise to the challenge to create value via myriad avenues.

One of the more popular methods lately centers on the mergers, acquisitions and divestitures (M/A/D) arena.

Buy low, sell high is the mantra — but there are no guarantees.

"There were actually two markets in 2001," said Robbin Jones, director of A&D solutions at IndigoPool.com. "The early one was robust, and then it slowed down.

"Buyers later in the year didn't believe the forward price curve, so we had a valuation gap between buyers and sellers."

Now that commodity prices have come off the lofty levels reached last year, Jones sees the market heating up.

"Companies that weren't willing to sell assets because of the great cash flow they were getting are now willing to sell, thinking they'll get a fair price," he said. "And they want to put the money into other assets that will give a better return."

Fueling the Trend

One way to contend with the roller-coaster price scenario when contemplating M/A/D activity is to ignore it.

"You have to look through the volatility, pick a long-term price case and stick with it," said Aubrey McClendon, chairman and CEO of Chesapeake Energy, which has a voracious appetite for M/A/D.

The company's latest foray into this arena is the purchase of its Oklahoma City neighbor, Canaan Energy, which is expected to be completed in the third quarter of this year.

Chesapeake's penchant for buying companies and assets is aptly reflected by its track record of $1.6 billion in acquisitions, or about two-thirds of its asset base. These all were placed on the books since 1998 when it began reinventing itself to focus on one commodity (natural gas), and one area (the Mid-Continent, where it currently is the second largest gas producer, according to McClendon).

He noted several Wall Street-fueled trends in the industry's ongoing consolidation:

  • Investor demand that companies have access to capital in good and bad cycles is driving a lot of the acquisition of small- and mid-cap companies.
  • Small and mid-size E&P companies aren't efficient public vehicles because cost of capital is high, they don't tend to hedge, etc. So the financial risk of owning a small E&P company has been magnified, unless they have a story that lets them command a premium multiple during those two-three years when everyone is excited about them.
  • The days of the $50 million IPO are over.
  • The majors are having to get bigger to compete globally, which will lead to less concentration in the United States — and put a number of assets up for sale in the next few years.

Musical Chairs

Still, McClendon doesn't envision an industry comprised of only a few super-majors. He predicted there always will be a place for the smaller companies — just maybe not in the public sense.

Many of these companies will be spawned by the now-small entities growing to the stage where they will merge or be acquired, leading to certain professionals leaving to acquire funding to start over again.

"The whole food chain feeds on itself," Jones said.

"Right now, the total number of mergers is decreasing, because it's like musical chairs," he added. " Each time the music stops, there's another chair taken away and fewer playing in the game.

"But I see the A&D market continuing to grow as a result of the huge mergers we've seen beginning in the late '90s," Jones continued. "Sooner or later these large combinations will have to dispose of properties that are no longer core to them.

"We haven't yet seen the floodgate release of all these properties onto the market, and it's got to happen."

Mark Schneider, senior director and AssetExplorer product manager at Petroleum Place, concurs.

"A lot of companies that did major acquisitions are beginning to come out of their pooling restriction periods, when they were unable to sell their assets for a fixed period of time," Schneider said.

"So in the next little bit of time we'll see people returning to portfolio analysis," he continued, "taking segments of their asset base and putting them through auction or in a negotiated sales package, or marketing them through E-brokered services."

24/7

When this happens, expect the Internet to play a key role, with some companies destined to be at the forefront of the action.

Indeed, oil and gas industry E-commerce marketers who facilitate asset transactions via the Internet seemingly occupy a win-win niche — whether it's a buyer's or seller's market.

Online auctions have proven to be an efficient way to buy and sell properties, according to Rich Herrmann, senior vice-president of technology and business development at Petroleum Place, which hosts these events and a variety of other type enterprises.

"We've done $1.3 billion in transactions through our auction platform," Herrmann said.

"Our floor auctions are really a hybrid, incorporating online as well," he continued, "but 20 percent of our closings now are through our purely online auctions."

While auctions assuredly have hit their stride, they are best suited for relatively straightforward asset sales rather than properties that have to be quantified and qualified by teams of technical and financial professionals.

Potential buyers in these types of transactions must rely on the data room milieu to access and study relevant information in order to evaluate the offering sufficiently to negotiate a purchase.

Increasingly, this activity is taking place in online data rooms, which are becoming the venue-of-choice for sellers wishing to realize top dollar for their assets. These sophisticated electronic repositories afford potential buyers the opportunity to evaluate properties in greater detail and more efficiently than ever before to determine a price that aptly reflects the value of the assets, according to Jones.

Even though buyers typically need only to register with a site and acquire a unique password to log-on, convincing them to do so initially was no slam-dunk.

"When we started with the online data room concept, there was resistance," Jones said. "People were used to visiting the actual physical room, which was filled with boxes of files and where the walls were covered with maps.

"During the course of usually only a day's visit to this type facility, potential buyers — who often are evaluating many opportunities at once from data housed in different data rooms — have to sift through reams of paper files," Jones said. "They make copies of what they consider to be the most pertinent material and leave with the information they'll use to make their decision."

Compare this to the online data room where buyers have 24/7 access via the Internet to all the data for maybe a month or more, and it's easy to understand why there's been an evolution in users' acceptance since the inaugural sites.

In these online "rooms," individuals can work at their convenience, either alone or together as a team to study the data. There is no need to travel — a considerable savings in both time and money.

Big bucks are involved here.

"We've handled asset packages of more than a billion dollars in value," said Steve Akers, director of business development at IndigoPool.com. "We also set up the data room for the $750 million sale of North Central Oil to Pogo that closed early last year (see related story, page 18)," he noted.

"If you're making a decision to buy something worth hundreds of millions of dollars and you're under pressure like the traditional one day in a physical data room," Akers said, "it's tough to get enough information to determine the best price to bid."

The logistics alone validate the superiority of the new milieu versus the old.

"A client had a large group of properties that we broke into eight separate packages, each averaging about 10 to 15 data rooms," Akers said. "Doing this the traditional way it would have become almost unmanageable, taking months to set up and requiring maybe a whole building of office space, not to mention the complexity of scheduling and overseeing all the visits.

"Online, it's parallel, meaning all users can come in at the same time," he said. "And it's evergreen, so as changes occur like new wells on production, new seismic, new completions and such, we can add these with a few keystrokes and announce them to the buyers immediately."

The digital data in the online data room are ideal for archive or backup purposes. A CD can be burned to replicate the room on the day it opens and closes, providing a clear record of the room's contents should a future dispute arise over a sale.

One of the "comfort" factors that must be dealt with in the online environment is the issue of security.

"There's a mindset that if it's out there on the Web, it's just gone and you have no control anymore," Jones said. "But because of the technology, there's the same level of security online as in the physical data room. This includes the documents, the session itself, where the user can go and the actual server."

Besides the advantages of compressed cycle time for the seller, the ability to reach a wider audience of potential buyers on their own turf enables online data rooms to level the playing field. Potential buyers of any size at any locale are exposed to the exact same data. Even the smallest independents now can tap into asset offerings worldwide as easily as the big players, with only a mouse click.

And the role of electronic data rooms extends beyond buying and selling.

When two companies merge, legacy data sets can be put online to facilitate a faster combination of the two entities in terms of managing the assets acquired.

"In that handoff of assets one to the other," Akers said, "it would be advantageous to build online data rooms for post merger due diligence in the transition time, where you're taking all legacy assets and systems and putting them together.

"Merging these legacy systems into one usually takes several years," he added, "meaning they're running two systems for all their assets. Having a data base in a data room to help manage during the transition would be a real advantage."

The paradigm shift where people are moving from the physical data room to the online environment has reached the midway point, according to Jones. He predicted as bandwidth grows and becomes relatively ubiquitous and inexpensive, it will enable myriad possibilities for the online experience.

Look for changing demographics to impact the future utilization of the online environment in the industry.

"The average age in the industry now is 47 years," Herrmann said. "As this demographic changes, we'll have people coming in who are used to the Internet being part of their lives and who are more comfortable using it.

"We already see people starting to do more true technical analysis online."

In fact, Jones noted that IndigoPool had a couple of projects recently where G&G applications were provided through LiveQuest, an ASP service provider.

To achieve the full benefit of the online potential, Herrmann emphasized it's crucial to look for places where the Internet and its efficiencies play really well.

He cited the example of their now-standard hybrid auction, where bidders on the floor of the auction venue compete simultaneously with those online.

"Another prime example," Herrmann said, "is the electronic data room as a supplement or eventual replacement of the physical data room."

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