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Dec. 9 (Bloomberg) -- After the two busiest years for energy deals, the party has fizzled out and 2014 isn’t looking much better.
Mergers and acquisitions in the North American energy industry fell to $117 billion this year as buyers’ preferences for smaller assets and joint ventures limited corporate takeovers to the lowest dollar amount since 2004, according to data compiled by Bloomberg. The largest deal this year was Devon Energy Corp.’s $6 billion purchase of Eagle Ford shale assets, while last year there were three acquisitions of entire companies topping that amount, led by the $15 billion takeover of Nexen Inc.
Energy stocks are still more expensive than their historical averages, widening the gap between asking and selling prices. That will hold buyers back from big deals again next year, said Topeka Capital Markets Inc., which sees targets limited to cheaper companies that are concentrated in a single shale basin, such as Energen Corp. and Oasis Petroleum Inc. Acquirers will continue to pick off assets without having to pay the premium required for an entire company, Oppenheimer Holdings Inc. said.
“Buyers are playing a card game: You don’t want the whole deck, but you want the one card that will give you the ultimate hand,” Fadel Gheit, a New York-based analyst at Oppenheimer, said in a phone interview. “Expensive companies and assets are out of the question.”
Deal volume in the industry of $117 billion so far this year is the lowest since 2008, and if the tally is still at this amount at year-end, it’ll be down 37 percent from $186 billion in 2012, according to data compiled by Bloomberg. It’s being dragged down by the slower pace of energy corporate takeovers, which total just $51 billion, the data show. That trails the $59 billion of asset sales, joint ventures and minority purchases that have been announced this year.
The record year for energy deals was in 2011, when there were $213 billion of transactions, the data show.
The trend away from full company purchases contrasts with 2012 when corporate takeovers accounted for the largest transactions and exceeded asset sales, joint ventures and minority purchases, the data show. At the top of the list were the sale of Nexen to China’s Cnooc Ltd. and Freeport-McMoRan Copper & Gold Inc.’s $10 billion purchase of Plains Exploration & Production Co., the data show.
At the same time, oil and gas stocks -- particularly ones with shale exposure -- have been getting more expensive, with the MSCI North America Energy Index rising 16 percent this year. Companies in the index were valued last week at an average of 7.3 times earnings before interest, taxes, depreciation and amortization, versus an average of 6.6 in the past five years, data compiled by Bloomberg show.
“Companies are always looking for bargains, and to tell you the truth, there are no bargains left,” Gheit said.
Rising prices were preceded by a land grab for oil and gas fields where producers are employing newer drilling techniques to crack open shale rock and pump fuel that otherwise would have been unrecoverable. The ideal takeover candidates are those with a presence in the region’s shale basins, which mean they’re more costly, said Gabriele Sorbara, a New York-based analyst at Topeka Capital.
“The guys situated in the core shale plays aren’t going to go for a cheap valuation because they know what they’re sitting on,” Sorbara said in a phone interview. “Knowing what the potential upside is, do you really want to sell out at this stage?”
Analysts and investors predicted that companies from the $44 billion EOG Resources Inc. to Encana Corp., with a market value of $14 billion, may be acquired this year. Instead, no offers have emerged as buyers this year such as Devon Energy have opted to purchase assets rather than whole corporations.
“Companies are looking to buy assets that will make their existing ones better,” Gheit of Oppenheimer said. “They mix and match. With a corporate acquisition, you get a whole basket and some assets that you don’t want.”
Only about 27 percent of M&A professionals from U.S. corporations, private-equity firms and investment banks surveyed by KPMG said they expect energy to be among the two most active industries in M&A in the coming year, according to a report released last week. Technology, media and telecommunications; health care and financial services were more common answers, KPMG said.
“In some ways for E&Ps, there’s a thought that the great land grab for acreage is slowing, if not over,” Jim Penilla, a St. Louis-based director on Robert W. Baird & Co.’s energy investment banking team, said in a phone interview. But “the overall energy M&A market remains robust. If commodity prices hold up, stock prices hold up, and debt financing markets continue to be good, I don’t see why 2014 won’t be an active year.”
Topeka Capital’s Sorbara sees six of the stocks he covers as potential targets because they’re undervalued compared with others in the Permian and Utica shale basins: Energen, Diamondback Energy Inc., Magnum Hunter Resources Corp., Oasis Petroleum, Rosetta Resources Inc. and SM Energy Co.
Energen, which had an enterprise value of $7 billion last week, may even be attractive for private-equity suitors because it’s trading at a discount to its sum-of-the-parts value of $100 a share or more, Sorbara said. Energen’s stock price closed last week at $68.79.
SM Energy is the cheapest of the group, with its $7.3 billion enterprise value last week equal to just 4.3 times trailing 12-month Ebitda, according to data compiled by Bloomberg. Energen fetched a multiple of 8.1.
Oasis, with an enterprise value of $6.7 billion last week, may lure takeover interest after it added 161,000 acres in the Williston basin to become one of the biggest landholders in the largest continuous shale-oil deposit in the U.S., Tim Rezvan, a New York-based analyst at Sterne Agee Group Inc., wrote in a Sept. 10 report.
Today, Energen fell 0.6 percent to $68.39 at 10:20 a.m. New York time. SM Energy slid 2.8 percent to $82.47, while Oasis lost 2.6 percent to $43.58.
Representatives for Energen, Diamondback, Magnum Hunter and SM Energy said their companies don’t comment on speculation. Representatives for Oasis and Rosetta Resources didn’t return phone calls or e-mails seeking comment.
One problem acquirers have faced is focusing more on the growth from an acquisition than on the potential return on the investment, Brian Youngberg, a St. Louis-based analyst at Edward Jones & Co., said in a phone interview. Or, they sometimes buy at the wrong time, he said. For instance, Exxon Mobil Corp. offered $41 billion for XTO Energy Inc. in 2009 in a bet on gas, before the price of the fuel plunged.
“The ones that figure out how to grow without sacrificing returns, those will be the winners over time,” Youngberg said.
--Editors: Sarah Rabil, Beth Williams