Among U.S.-based shale oil and gas buyers, “there's a feeling that Asian buyers are overpaying,” an M&A advisor said.
If using their own deal metrics, that would be correct, Jeet Benipal, a managing director of Tokyo-based Mizuho Financial Group’s U.S.-based unit Greenhill & Co., told attendees at Hart Energy’s Energy Capital Conference in Houston recently.
But Asian buyers “have a lower cost of capital to begin with and lower return thresholds,” he said.
Also, Asian buyers of U.S. producing properties are “underwriting these assets for the long term. The model is to acquire them and hold them for 20 to 25 years.”
They “look at it in a different way than most of the U.S. strategics that are acquiring assets either to build and flip or for a limited, sort of 10- to 15-year time period.”
Their math on what a property is worth is different than the math U.S.-based E&P buyers use, he said.
Where U.S.-based E&Ps have an advantage, though, is when bidding for property with more upside—less PDP and more PUDs and other future-well inventory.
“Given the history of results with respect to Asian buyers and unconventional shale plays, [Asian buyers are] going to tend to focus more on assets and companies that have mature, PDP-heavy, base production,” Benipal said.
“Their main focus is flow assurance. They want to acquire assets that have sizable production and they want to maintain that production for the foreseeable future.”
Meanwhile, U.S. operators can differentiate themselves when bidding because of “their knowledge base and their ability to explore further within the existing shale plays.”
EOG Resources’ plan to buy Ohio Utica oil producer Encino Energy for $5.6 billion is an example.
“U.S. strategics will still have opportunities and I think that would tend to focus more towards assets that have a lot more upside,” he said.
100% ownership
In the early 2010s, foreign buyers of U.S. shale interests took non-operated positions to get a look at tight-rock wells’ results and costs.
“This time around, it’s a slightly different strategy,” Benipal said. “They're coming in with the intent to acquire a majority stake or 100% of the company.
“They would love to work with the existing management teams, but they also have their own ideas. So they want control of their assets and control of their destiny.”
A lot of U.S. gas-producing property is on the market right now—up to six of them being large deals—and a lot of potential U.S.-based and foreign buyers are lined up to strike the right bid/ask, he said.
“I think in the next six to 12 months, our hope is that you'll see multiple gas transactions being announced.”
He estimates at least $10 billion of transactions are at or near the closing table.
“Not every deal is going to get done, so we will have to wait and see. But there's huge potential from an M&A standpoint in the coming six to 12 months,” Benipal said.
Deals, interrupted
Mizuho Greenhill advised Tokyo Gas in its Haynesville-focused TG Natural Resources unit’s $2.7 billion acquisition of Haynesville neighbor Rockcliff Energy II in December of 2023.
At the time, Benipal and the team expected more Asia-based buyers of U.S. gas property. But President Biden’s January 2024 pause on issuing new LNG export-plant permits created uncertainty in striking the right deal price, he said.
Asian buyers’ U.S. gas property is a physical hedge on their LNG purchase agreements, “a full complete value chain from wellhead to water.”
“So it took a little longer, but I think we're finally there now. There's a lot of interest from several different Asian strategics trading houses in U.S. natural gas upstream assets.”
Driving this is U.S. gas producers’ proof of the ability to maintain production levels as well as capital discipline.
There’s a new impetus too, he added: U.S. power generation demand to power AI data centers.
“Obviously, the U.S. wants to be the global leader when it comes to AI capabilities, and rightly so. We need that.
“And that's driving the need for compute power, which requires 24/7 power generation, and natural gas is the primary source of fuel for those power-generation assets.”