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Shale M&A expected to crank up as producers sell gas assets to drill oil

With a mild uptick in oil and natural gas futures prices, analystsexpect to see shale oil and gas drillers jumping into the M&A game. Their motivesand means will be as different as the Permian is from the Marcellus.

Private equity will be the buyer of older shale gas assets inplaces like the Haynesville and Barnett Shales, analysts theorized, as several largeindependents resembling Anadarko PetroleumCorp., Apache Corp.,and Devon Energy Corp.,look to finance the purchase of more Permian shale oil assets.

In Appalachia, the M&A equation will be about acquisitions,analysts noted, as top Marcellus players, such as Rice Energy Inc. and EQTCorp., shop for bolt-on acreage that allows for even longer well laterals,lowering costs. Rice's $2.7 billion purchase of its Greene County neighbor may be just thebeginning for the driller which has made no secret that it's in the market for moreleases in the county.

Supermajors will watch from the sidelines, analysts said, gunshy after Exxon Mobil Corp.'s$41 billion purchase of shale gas driller XTOEnergy Inc., which has yet to move the needle on the giant's oil andgas results.

"The majors need large acquisitions to have any meaningfulimpact on their gas production," Oppenheimer & Co. Inc. analyst Fadel Gheitsaid. "Exxon's acquisition of XTO was a major disappointment and will needmuch higher natural gas prices to generate acceptable return. It was a bad dealfor Exxon and scared other potential buyers."

And the Appalachian shale gas companies don't need a deal rightnow, Williams Capital Group LP analyst Gabriele Sorbara said. "The large coreAppalachia companies have access to the capital markets and do not need to sell.Historically, we have witnessed premiums of 20%-40%, which may not be enough, giventhe potential upside in a normalized environment. These companies can wait it outfor a better time to monetize — when they are generating free cash flow."

"I think it will be tough for the majors to justify acquisitionsat current valuations, which would be dilutive, especially to the company's dividend,"Sorbara said.

"Herding cats was not their game," Guggenheim SecuritiesLLC analyst Subash Chandra said of the majors and shale. Instead, Chandra said,look for big independents with close splits between natural gas and oil productionto shift more toward oil. He expects big independents to be selling shale gas acreagein Appalachia, Texas and the Midcontinent to finance more shale oil efforts in thePermian.

Nomura Securities International Inc. analyst Lloyd Byrne thinksAnadarko, whose total production was about 47% gas in 2015, is ready to sluff offmore shale gas to finance a renewed move offshore as well as adding to its Texasefforts. "Selling Marcellus, East Texas and/or even Eagle Ford positions makessense to us," he said Oct. 3. "Anadarko's core asset quality is high."

Devon, with 40% of its 2015 production being gas, is anotherlarge independent in position to choose between shale gas and shale oil, Paul Sankeyat Wolfe Research LLC said Sept. 26. "Among the large-caps, Devon Energy hasamongst the greatest optionality to natural gas upside in its portfolio with 600knet legacy acres in the Barnett."

Sankey pegs Devon's Barnett costs, under a new well refracturingprogram, at 50-cents/Mcfe, about half of its competitors. But cheap Barnett gasis still in stiff competition with oil. "We look at the relative economicsof Barnett refracs vs Devon's programs in its emerging liquids plays — DelawareBasin and Oklahoma SCOOP/STACK — to see if a Barnett program could really competefor capital within the company's portfolio. The simple answer is no," Sankeysaid. "However, the Barnett exposure does afford a measure of optionality shouldcrude oil remain weaker than expected, perhaps versus strengthening natural gasdemand and exports lifting Henry Hub pricing into the mid-$3[/MMBtu] range. We alsowonder whether the Barnett's proximity to the growing Gulf Coast export/demand centercould make production from the play more appealing to a long-term buyer" suchas an LNG exporter.

Denver independent QEPResources Inc., 55% gas in 2015, is another company that can use gasassets to finance oil deals, according to analysts at Tudor Pickering Holt &Co. "Look for company to remain acquisitive over the next few years, fundedby gassy asset sales," they told clients on Oct. 7.

"We think it's fair to say company will likely continueto look for bolt-on deals in the Permian, and perhaps even in the core of the Bakken,"TPH said. "Though balance sheet remains in good shape, robust acreage valuationsin the Permian and a less than premium equity currency likely means company willuse asset sales to at least partially fund acquisitions."