CERAWEEK -Sales of energy assets to pick up after 2013 pause, bankers say

HOUSTON, March 4 Tue Mar 4, 2014 6:14pm EST

HOUSTON, March 4 (Reuters) - Asset-sale activity in the energy exploration sector should wake up from its 2013 slumber as industry majors make hard decisions about what assets to shed after a binge of deals completed earlier in the decade, several energy bankers said on Tuesday.

After the acquisition surge of the early 2010s, last year "was a year to reassess, to look at what you bought, to ask, do we need all this stuff," said Maynard Holt, head of exploration and production investment banking at Tudor, Pickering, Holt & Co.

"It was a year of digestion," Holt said at the IHS CERAWeek energy conference in Houston.

The number and value of merger and acquisition transactions declined last year as companies worked to digest deals completed in the previous few years, driven largely by an explosion in shale oil and gas exploration.

In 2014, "we will get out of this digestion phase," Holt said, as large energy companies seek to improve their portfolio and liquidity.

"The beginnings of the deal market improving are here," he said.

Potential investors, such as private equity firms, were deterred by an inability of exploration and production companies to boost oil and gas output in recent years despite spending billions of dollars each year, said Poppy Allonby, managing director of BlackRock Investment Management Ltd.

Investors want the industry "to demonstrate that the capex being spent is going to earn a decent return," she said.

"If (investors) can't see that it's going to earn a decent return, there's pressure for management" to pursue asset sales instead, Allonby said.

The environment for asset sales and mergers will be more difficult and some assets will not find buyers, said Jonathan Cox, Morgan Stanley's managing director of energy M&A activity.

"There's a surprising consensus among companies and investors about what is worth owning and what is not," Cox said. "Too many people are going for the same assets: the core Bakken, the Permian (Basin), the Eagle Ford and the Niobrara."

As a result, Cox said, he sees a shortage of buyers for "legacy assets that in many cases can be proved to generate terrific returns. That will have to change."

Cox called the growing influence of activist investors on corporations' strategic decisions "unprecedented."

He said the "tremendous pressure" on energy-company boards to reduce capital spending shows that "investors don't understand the capital intensity; they don't understand the returns and they want to see some capital returned to shareholders."

Given the environment of rising production costs, "it's very challenging for a CEO to go the board and advocate for a transaction," Cox said.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article