Volatility Makes a Seller of Brigham Exploration: Analysts

Market volatility isn't going to force a company to sell, but it may make independent exploration and production companies more amenable to modest premiums from deep-pocketed buyers.

This was one of the big takeaways on Wall Street after Statoil's(STO) $4 billion acquisition of Brigham Exploration(BEXP).

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"I think the volatility is driving some sellers to the table," said Curtis Trimble, analyst at MKM Partners. "Deeper-pocketed players that can build into volatility probably are incrementally more attractively positioned than smaller companies that are built on acreage that, likely, will have to come to the capital markets to fund much of their development capital." This argument doesn't mean, though, that the traditional energy M&A drivers aren't in the equation. Foreign buyers are still anxious to acquire North American assets, and liquid-rich assets in particular are attractive. Both of those trends are implicit in the Statoil acquisition of Brigham Exploration. Companies with substantial production and a large undeveloped acreage base in at least one emerging resource play are in the sweet spot, too, but the pressure may be on some of the independents to reach their exit strategy more quickly, and less richly, than they would have thought just six months ago.To gauge how swiftly premiums can narrow in the space, analysts pointed to the deal in July when BHP Billiton(BHP) acquired Petrohawk(HK).Tim Rezvan, E&P analyst at Sterne Agee, noted that Petrohawk sold out at the top of the market in early July and got a 65% premium. Brigham, on the other hand, sold out after a small bounce from recent lows for a 19% premium."Both companies were acquired because they had a large presence in a desired liquids shale play. Both companies lacked the ability to do a full-scale development plan nearly as quick as a deep-pocketed integrated ... but I think the recent volatility may have forced some independents to adjust to a new valuation level," Rezvan said, though he stressed that he can't comment on Brigham's motivation specifically without active coverage of the company.Kevin Cabla, energy analyst at Raymond James, said the recent deals and the timing of the deals show that management of independent E&Ps are ready to get out and not willing to "wait on the market." Yet he cautioned in the wake of Brigham's deal that names like Cabot Oil & Gas(COG) and Range Resources(RRC) are trading at takeout premiums well above the average takeout multiple.

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"I think that a lot of these pure-play E&Ps have been looked at by the foreign and domestic big guys, when volatility like this kicks in, crude prices dive, stock prices get crushed," Cabla said. "It makes a lot of these smaller E&Ps much more attractive. The long-term fundamentals of the oil market are still very bullish despite a sluggish economy, which makes this an even better time to get into the space."

The Raymond James analyst said that even with valuation and volatility underlying the Brigham deal, the basic energy M&A equation hasn't changed."

Even though the market likes oil/liquids-rich companies, it's become obvious that the E&P space (no matter what type of asset profile you have) is still attractive to large foreign and domestic companies. That implies the space is still undervalued," Cabla said. He pointed to Kinder Morgan Partners'(KMP) purchase of pipeline company El Paso (EP) at a 37% premium to last Friday's closing price, also announced on Monday morning, as an example that a company doesn't have to be "oily" to attract a substantial premium -- Kinder Morgan plans to divest El Paso's E&P assets.Independents companies not tied up in joint ventures are also proving easier to sell, which has also been an established trend. While a Chesapeake Energy(CHK) continues to be seen as a doubtful takeout target due to its complicated joint ventures, Petrohawk, El Paso and Brigham were all free of joint ventures. That led Raymond James' Cabla to the conclusion that Chesapeake, as well as Pioneer Natural Resources(PXD), SM Energy(SM) and SandRidge Energy(SD), among others, remain less likely to be acquired.The number of potential acquirers in the space continues to grow, too, with foreign conglomerates, such as India's Reliance Industries -- which has recently enacted a joint venture with BP(BP) -- showing a big appetite for energy acquisitions. Reliance has a $12 billion war chest to fund E&P acquisitions, according to Bloomberg, and the Chinese petroleum companies have been very active in recent years in acquiring North America energy asset stakes. In the U.S., the shedding of refining assets by Marathon Oil(MRO) and ConocoPhillips(COP) brings even more motivated E&P acquirers into the mix.Still, even with added motivation for deals from a streamlined Marathon or ConocoPhillips, and independent E&P company management exit strategies being adjusted, "Deals are coming regardless," Cabla said.RELATED STORIES: >>Energy M&A Boom: Deals to Watch

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