The Wall Street Journal reports:
Long live Gas Deals.
The one on the slab is 2007's $45 billion buyout of TXU, now known as Energy Future Holdings and facing bankruptcy. With natural gas usually setting power prices in Texas, TXU was effectively a leveraged bet on gas. When the deal was announced, futures indicated that gas would average almost $8 a million British thermal units over the following five years. One shale boom and economic recession later, it actually averaged less than $5.50 and was heading down, hence Energy Future's lack of a clear one.
Today's front-month gas price is only about $4.60, and futures don't even breach the $5.50 level until late 2022. Yet private equity is coming back to gas, and with good reason.
This time, the focus is on the upstream: gas exploration and production. Encana, the Canadian gas producer, recently sold its interests in the Jonah field in Wyoming to TPG Capital, which also bought into TXU, for $1.8 billion. With the first quarter barely out of the way, private-equity acquisition volume of onshore, gas-weighted assets in North America, as opposed to those with oilier reserves, already is larger than for all of last year, according to data prepared by Joe McGerigle at research firm IHS. Annualized, it would equal the last four years combined.
Even more striking is the amount of gas output private equity has been buying: 323 million cubic feet a day, the highest since at least 2009. Meanwhile, private-equity investment in oily North American onshore assets has dwindled to almost nothing.
The latter are much more in demand from exploration-and-production companies. Recent history has conditioned most E&P firms to adopt the mantra of "oil good, gas bad." Oil prices have remained strong, while the shale boom has flattened long-term expectations for gas. The E&P sector has redeployed as much cash as possible toward oil. Indeed, that is how Encana will spend the proceeds from Jonah.
The IHS deals data confirm this. More than four-fifths of asset acquisitions by private equity since the start of 2013, measured in dollars paid or output, were gas-weighted. For other buyers, gas assets have accounted for less than 60% of output and less than one-third of dollar volume.
This also is reflected in deal multiples. Those on oil-weighted assets have risen from less than $17 a barrel of proven reserves in 2009 to more than $21 this year, according to IHS data. Gassier assets, though, have stayed stuck in a range of between $8 and $12 a barrel of oil equivalent. That is much different from TXU, whose stock was trading close to its all-time high when the bid arrived.
For private equity, this is a better situation: E&P firms are selling gas assets to finance their oil push. As Dan Pickering, chief investment officer of TPH Asset Management, says, "Put all this together and you have a buyer/seller bid-ask spread that is finally starting to move closer."
Furthermore, the outlook for gas prices is getting better. The harsh winter has left U.S. gas inventories at their lowest level in 11 years. Just four billion cubic feet of gas was injected into storage in the week ended April 4, about one-quarter of what analysts had expected. Meanwhile, the E&P sector's fascination with oil means that drilling for gas is moribund, and demand looks set to rise as petrochemical and export plants expand.
