Let the energy merger games begin.
With nervousness from energy investors at its peak, the smart energy money -- meaning the companies that actually own and control the hard assets -- continues to suggest that investors are overthinking the sector's troubles.
Today's deals --
decision to purchase both
Western Gas Resources
( WGR), and
final victory for
-- all suggest that there is value left in the energy world.
Climb Every Mountain
Anadarko is headed to the Rockies in a big way. The company's decision to purchase Western Gas Resoruces and Kerr McGee gives the Houston-based exploration-and-production giant a dominant foothold in the natural-gas-rich Rockies. The combined companies will be among the largest independent exploration companies in the world, with nearly 1.5 billion barrels of oil reserves and over 12 trillion cubic feet of natural gas reserves.
While a combo purchase in any producing region would be noteworthy, Anadarko's decision to concentrate in the Rockies today is even more intriguing because of the general lack of respect Rockies producers have received recently.
With natural gas storage at near-record highs, Rockies gas prices have weakened materially. During the summer months, most gas that is produced in the Rockies is shipped (via pipeline) to storage, as summer natural gas usage in the region is light, with little demand for natural gas. Conversely, the winter months see a significant increase in natural gas demand for heating in the region. This year, fears of too much gas in storage and the potential of overflowing pipelines have depressed Rockies prices.
As a result, many of the stocks of Rocky Mountain production companies have been weak. Today, however, Anadarko chooses to ignore the short term and instead is returning attention to the long-term natural gas story.
And that angle makes the Rockies region much more attractive, as it remains one of the more prolific natural gas plays in North America. And prolific is important in today's natural gas environment. With average well declines approaching 30%, little net production response even with a doubling of rigs drilling for natural gas and increasing costs of production, lower-cost, longer-lived asset basins such as the Rockies will be key to the future natural gas supply in North America.
Jim Hackett, Anadarko's CEO, is one of the most strategic thinkers in the business. As a result, when a company such as Anadarko ponies up to the plate with not one but two acquisitions, investors should take note.
What is nearly certain is that other companies will take note and, as a result, companies producing in the Rockies are likely to get the once-over by a number of potential suitors. The table below shows the major companies with Rockies exposure and in which basins they produce.
All that said, it's important not to become too excited about companies just because of the potential for deals. What is correct is to understand why these deals were done. They were done because Anadarko has the ability to look past the noise and because natural gas markets will remain tight for years to come.
In addition to drawing attention to the Rockies, the Anadarko transaction also draw attention to the ability to finance larger transactions in the exploration-and-production space. That means more attention to the potential of transactions among larger independents. The "pin action" is now likely to move from large independents buying smaller independents to combinations of large independents and -- imagine this -- majors buying large independents.
We know, for example, that
continues on its hunt for the right North American natural gas play. With Anadarko's ability to spend billions on two blockbuster transactions in one press release, the potential of a major integrated tendering for a major independent is not out of the question.
That leads to names such as
( XTO) and the like. While there are no indications of a pending deal, Anadarko's ability to get these two deals closed will likely make other companies willing to take the step into larger transactions.
And with strong cash flows from oil and gas production combined with the capital market appetite to fund such combinations, more are likely to come.
In short, the oil and natural gas world has just been re-energized.
Christopher S. Edmonds is partner and managing director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.