(Chevon, Atlas Energy, natural gas M&A story updated for BMO Capital comments)
NEW YORK (TheStreet) -- You know the drill: a major oil company buys an independent natural gas producer and the proverbial M&A floodgates are set to open in the energy M&A game.
HK), up 6% on Tuesday on heavy trading volume. It can always be said that the latest M&A deal puts a floor value on assets, but the Chevron-Atlas deal doesn't necessarily mean that other independents will be rushing to wave the white flag in the natural gas market. Analysts described the deal as a "take the money and run" decision by Atlas Energy, receiving a premium to current share price of 33%. Yet Atlas received a per-acre value of $4,000, and that's not likely to be anywhere near the expectations of a company like Range Resources for its acreage. In fact, back in April there were a series of deals signed in the Marcellus shale region valuing assets at $15,000 per acre -- Chevron has purchased 486,000 Marcellus acres from Atlas. At that time, Range Resources management was quoted by analysts as saying that value of its assets might double to the level of $30,000 an acre. It's clear that Range Resources represents the case of a long-rumored M&A target which may hold out for much longer based on the perceived value of its assets than Atlas, analysts say. Several analysts that cover Atlas were caught off guard by the deal, and ultimately concluded that while the share premium made the deal understandable, the price Chevron was paying for the assets made Chevron the real winner in the deal. Analysts surprised by the deal pointed to the fact that Atlas had set up a joint venture with India's Reliance Industries that took care of its immediate funding needs, and was attractive in terms of the ongoing revenue stream provided to Atlas Energy. "Atlas wasn't under any pressure to sell, and I thought they would have held on longer," said one energy analyst. Phil Weiss, analyst at Argus Research, said that the deal makes a lot of sense for Chevron from the standpoint of getting into the unconventional asset business, like Exxon did last year through its XTO Energy deal, and ultimately being able to leverage that expertise for a global portfolio of unconventional asset plays. Yet Weiss also agreed that most natural gas companies should be holding out as long as financing hasn't completely dried up, as prices in the natural gas market won't allow them to command high enough deal values.
"Petrohawk and Range are takeout names, and they are highly leveraged, but it's unlikely that now is the time. I expect both to slug it out for the next year to year and a half," the Scotia analyst said. Bouvier noted that Petrohawk still has more than $1 billion left in a credit line that it can tap, and even though its debt-to-cash-flow ratio makes it a high-risk company, it already has a plan in place to manage cash flow and make asset sales without using up its additional credit. The Scotia analyst said he thinks Petrohawk assets would be worth at least double the Atlas valuation. "These companies are built to sell, but are unlikely to sell in a sub-$4 natural gas environment," Bouvier said. The Scotia analyst said when speaking about the April Marcellus deals and the Range Resources management comment that it would continue to grow its assets to $30,000 an acre: "Their expectations are quite high; $15,000 an acre was the high point and the Range guys were saying their assets had much more value than that." Bouvier said he doesn't necessarily expect numbers like $30,000 an acre, but he does believe that in a low natural gas pricing environment, the divide between potential acquirers and sellers will continue to be an impediment to deals, and the Atlas decision won't serve as the proverbial floodgate. Argus Research's Weiss explained that the problem for many of the independents is if prices don't rise in the natural gas market. Unless the usual project funders -- who have already invested heavily in natural gas joint ventures and asset purchases -- want to double dip, capital will dry up for the independents and they will be forced to sell out. "Lots of stuff lately is telling me that eventually access to capital in the natural gas space dries up, so I won't be surprised if we see more deals, but it's going to take longer. Conditions haven't gotten bad enough yet," Weiss said.
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