Investor Relations in the 21st Century

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Tuesday, March 1, 2011

Libya turmoil invites PE buyers

High cost of oil assets means companies may view the current situation as a good selling opportunity



The turmoil in Libya could be putting US domestic energy exploration and development companies into play as private equity investors look for safer oil outside the Middle East.

‘I know of no one in the American oil patch who thinks fondly of Muammar al-Gadafi, but the erratic Libyan strongman has helped create an as-good-as-it-gets scenario for companies holding crude oil assets,’ writes Chad Watt, who covers the oil industry for Mergermarket, part of the Financial Times group.

In a blog titled ‘Will private equity live up to the oilman’s caricature?’, Watt speculates that some in the oil industry may view the current crisis as a selling opportunity. The post draws the conclusion that rising values in domestic oil reserves may inspire some to go shopping.


‘For the mid-size and private independent oil companies out there, that means it’s time to sell. Regardless of operational performance, their proved and less-than-proven inventory has grown more than 30 percent in value in the last 12 months,’ writes Watt.

‘Many oil and gas veterans I’ve interviewed view private equity and other financial buyers as willing to pay more for oil and likely to pay less attention to the quality and character of the particular hydrocarbons or company they’re buying.’

Wayne Beninger, managing director of the oil and gas practice for Allegiance Capital Corporation in Dallas, thinks otherwise, however. While he acknowledges that the violence and unrest in Libya have created uncertainty, he doubts they will cause a spike in merger activity over the near term, because it takes too long to put a deal together.

‘Here’s the rub,’ Beninger writes in reply to Watt’s blog post. ‘Deals usually don’t get done in 30 days. Depending on what happens in the Middle East during the elapsed time between the decision to sell and the actual closing, there could be a significant impact. If prices were to remain where they are now because conditions in the Middle East settle down, the deal would progress predictably, but if turmoil continues and spreads elsewhere in the Middle East the ‘fear premium’ will get baked into the deal terms.’

Speaking with Inside Investor Relations, Beninger says there is not sufficient confidence the climb beyond $80-$85 a barrel will be realized. ‘It will depend on whether prices remain high,’ he says. He is optimistic, however, that oil prices will remain attractive compared with cost of exploration, drilling and development, benefiting oil exploration and service companies.

For a link to the artcile in InsideInvestorRelations, go here.

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