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