Oil Companies May Wait for Hedges to End to Go Bargain Shopping

May 12 (Bloomberg) -- Quantum Energy Partners, the Houston private-equity firm that put together a $3.5 billion bankroll to go bargain-hunting for acquisitions after oil and natural-gas prices plunged, is waiting for a better time to pounce.

Buyers will accelerate acquisitions late this year and in early 2010 as the hedging contracts that shielded potential takeover targets from tumbling prices expire, said Wil VanLoh, Quantum’s chief executive officer.

“By the first quarter of next year, we’ll be pretty darn active,” VanLoh said in an interview at his downtown office. “Many companies are very well hedged for 2009, so the squeeze hasn’t happened yet. The point of capitulation probably will arrive in the fourth quarter or the first quarter of 2010.”

The record drop in crude prices from 2008’s all-time high hasn’t triggered a surge in takeovers because would-be sellers are demanding mid-2008 valuations, said Michael Bodino, director of research at Sanders Morris Harris Inc. in Dallas. That will change, Bodino and VanLoh said, as hedging contracts drop off, forcing the weakest producers to sell or face bankruptcy.

The number of oil and gas deals last month fell 35 percent from a year earlier, and the value of transactions dropped 60 percent to $5 billion, according to data compiled by Bloomberg. UTS Energy Corp. of Calgary repulsed a third and final takeover bid of C$830 million ($680 million) by Total SA last month, saying the company is worth more.

Time is Wrong

“Now is not a good time to buy because sellers have unrealistically high price expectations,” said Michael Harness, chief executive officer at Osyka Corp., a closely held oil producer in Houston. Harness, a former Amoco Corp. engineer, expects expiring hedges to begin forcing rivals to put oil and gas fields on the auction block as soon as July.

Producers that pre-sold their September 2009 output a year ago locked in a price of $106 a barrel, based on New York Mercantile Exchange futures. If that’s the last month for which they have hedges in place, the best they can hope to get for October production is $58 a barrel, or 45 percent less.

At Quantum, VanLoh and co-founder Toby Neugebauer gathered the managers of their portfolio companies last month to order a halt to acquisition activities on expectations that asset prices will decline more.

“We are still being very, very patient,” VanLoh said in an April 30 interview. “Everything is too expensive, given where prices are going.”

Alberta Acquisition Search

Quantum has invested in 23 companies that later were sold or went public. The firm staked Linn Energy LLC with $15 million in 2003 and took the partnership public in 2006. Houston-based Linn has a market value of more than $2 billion today.

In the Canadian province of Alberta, home to an oil industry that five years ago surpassed Saudi Arabia as the biggest crude exporter to the U.S., cratering stock values and lower energy prices have prompted the C$70 billion ($61 billion) Alberta Investment Management Corp. to step up the search for investment opportunities.

“With commodity prices where they are now, Alberta is looking like it’s going to present a lot of opportunities for us,” Chief Operating Officer Jagdeep Singh Bachher said in a telephone interview.

Edmonton-based AIMCO, as the Crown corporation is known, agreed last month to acquire a 20 percent stake in Calgary-based Precision Drilling Trust, Canada’s largest oil driller. AIMCO’s next move will be to sift through the market wreckage and find companies with assets and management teams most likely to excel even if energy prices remain depressed, said Brian Gibson, senior vice president for public equities at AIMCO.

Exxon’s Cash Priorities

Major U.S. oil producers such as Irving, Texas-based Exxon Mobil Corp. have said smaller producers and their fields are either too overpriced or too marginal to acquire. Exxon Mobil had $25 billion in cash as of March 31. Chevron Corp., the second-biggest U.S. oil company, had more than $9 billion.

Exxon Mobil’s top priorities for use of its cash are capital projects, dividends and stock buybacks, David Rosenthal, vice president of investor relations, told investors on an April 30 conference call.

New York-based Hess Corp., the No. 5 U.S. oil producer, said it hasn’t found any assets for sale that are worthy of tapping its $1.16 billion cash reserve, which will help fund exploration prospects off the coasts of Brazil and Australia.

Osyka, an owner of oil and gas wells in Texas and Louisiana that emerged from bankruptcy last year, is looking for assets in the $10 million to $50 million price range to add reserves and production, Harness said in an interview.

Canada’s Nexen Inc. isn’t finding companies worth buying because it’s seeing mostly assets that require $80-a-barrel oil prices to be viable, Chief Executive Officer Marvin Romanow said in a May 8 interview at the company’s Calgary headquarters.

“While we’re always on the lookout for acquisition opportunities, the situations we’ve looked at during this price collapse involved challenging assets with challenging financing,” Romanow said.