Bankers see busy oil and gas deal outlook for '07

By Anna Driver

HOUSTON, Feb 16 (Reuters) - Investment bankers expect brisk deal activity in the energy sector in 2007, as high oil prices stir stiff competition for production reserves and as capital from private equity and hedge funds freely flows into the group.

Last year was a record year for the global utility and energy sector, as the value of deals soared more than 80 percent over 2005 to more than $357 billion, according to statistics from Dealogic.

Big U.S. deals announced last year included oil and gas producers Anadarko Petroleum Corp.'s (APC.N) $22.5 billion purchase of peers Kerr-McGee and Western Gas Resources and pipeline company Kinder Morgan Inc.'s KMI.N $15 billion deal for investors and its senior management to take the company private.

Looking ahead in the oil and gas sector, analysts and investment bankers see potential for continued private equity interest in pipeline companies and assets that independent producers are selling, a leveraged buyout in the oil services sector and hostile takeovers.

"I think the market is going to remain robust from a deal perspective," said Andrew Safran, global head of energy, utilities and chemicals investment banking at Citigroup (C.N). "The larger energy companies are increasingly resource constrained and they have to grow reserves."

For example, a push by big oil-producing countries like Venezuela to renegotiate deals with international companies has already cut into crude oil production.

Also, high energy prices have spurred governments in other countries like Ecuador and Russia to take a harder line on production contracts.

William Montgomery, head of the natural resources group at investment bank Goldman Sachs Group Inc. (GS.N), also described the environment for deals as robust when speaking to a group at Cambridge Energy Research Associates annual CERA Week conference in Houston.

"There are always disagreements about value, whether prices are high or low," Montgomery said, adding that those disagreements lead to deals being done. Private equity firms are buying reserves that public companies no longer want, he said.

In one example, Dominion Resources Inc. (D.N) is pursuing the sale of its oil and gas exploration business. Dominion sought $15 billion for the assets, which include properties in the deepwater Gulf of Mexico, but no buyers have been found at that price, sources have said.

Goldman's Montgomery also said there were enough discussions "bubbling" around to lead him to believe that the energy sector would see "hostile actions" in 2007, especially if stock prices fell.

The panel also said that if there were a large leveraged buyout along the lines of Kinder Morgan this year, it would most likely be in the oilfield services sector.

Private equity firms also like the services sector because of its steady cash flow and reduced sensitivity to commodity price changes.

Last year and this year, several drillers have been talked about as potential targets for leveraged buyout or consolidation, including Noble Corp. (NE.N), Nabors Industries Inc. (NBR.N) and Diamond Offshore Drilling Inc. (DO.N).

But in a recent conference call, Noble's Chief Executive Mark Jackson said his board had "zero" interest in pursuing a leveraged buyout, while Nabors top executive Gene Isenberg said recently there were no deals "on the front burner."