Kuang-Chung Hsu Michael Wright Zhen Zhu The University of Central Oklahoma. For the presentation at October 2015 USAEE/IAEE Meetings, Pittsburgh, PA

Transcription

1 Kuang-Chung Hsu Michael Wright Zhen Zhu The University of Central Oklahoma For the presentation at October 2015 USAEE/IAEE Meetings, Pittsburgh, PA

2 The issue Motivations for the study Literature review Data and research methodology Empirical results Conclusions and implications

3 Traditional M&A definition M&A in O&G E&P sectors (our dataset) Volumetric production payment (VPP) Acreage Corporate Joint venture (JV) Property and royalty Most deals are in three categories: acreage, corporate and joint ventures

4 The U.S. O&G industry has experienced its own transformation more recently, particularly due to the development of new technology in horizontal drilling. Technology has enabled E&P activities in previously unexplored territories and caused production booms unseen in many years, especially since mid-2000.

5 The production booms have lead to interesting and important price dynamics and responses to the changing prices, it also provides some unique perspectives on the M&A activities in the O&G industry, especially in the upstream sectors of the industry While there was a rapid increase in M&A activities prior to the 2008 recession, the recession appeared to have slowed down the M&A activities. The post-recession M&A activity peaked in 2011 and then tapered off towards 2013 (Hsu, Wright and Zhu 2014 IAEE Energy Forum article)

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7 Most of the M&A activities occurred in a few geographical locations such as Gulf Coast, Midcontinent, Rockies and Permian Basin. Early plays include Barnett, Hayesville, Fayetteville, latecomers include Bakken Shale, Marcellus Shale Not a lot of information or Marcellus Shale yet in the dataset, so our current study omits the activities in the area

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9 Each shale region exhibited some specific patterns at different times. What factors determined the patterns? Are these factors similar to those found for M&A in other industries? Or industry specific factors are more important to the O&G industry? Are the M&A persistent? We have not been able to find academic studies on the subject

10 Conventional financial theories suggest that M&A activities are typically pursued for strategic purposes and efficiency gains by achieving operational and financial synergies. Stock market valuations (Shleifer and Vishny 2003; Rhodes-Kropf and Viswanathan 2005; Rhodes-Kropf et al. 2004; Dong et al. 2003; Ang and Cheng 2003): stock market performance tends to drive the M&A in the economy. This is consistent with Tubin s q-theory of investment: as the market value gets bigger than the replacement value, firms make investment.

11 Neo-classical theory of M&A rely on fundamental shocks to the economy or industry to explain M&A Industries react to the economic or industry shocks by reallocating assets through M&A. Capital liquidity theory (Harford 1999; Schlingemann et al. 2002; Harford 2005): while economic or industry shocks (including technology) provides motivation for M&A, capital environment is one of the enabling conditions

12 A few studies on O&G industry investment (not necessarily M&A) (Mohn and Misund 2009, Kellogg 2014): macroeconomic uncertainty affects investment in O&G industry Assets & Reserves: (Ng and Donker 2013) used Canadian data to study the motivations for M&A: strategic considerations increasing reserve, taking advantage of high market valuations

13 Data were obtained from Petroleum Listing Service (PLS) Period: A total of 4338 transactions 2050 transactions have values

14 Production: production may signal the value of the assets Commodity price: again signal the value of the assets Market liquidity conditions: more liquid market, the easier to finance, thus more M&A activities we use the interest rate spread between the industrial and commercial rates and the federal funds rate, and corporate bond yield Overall market valuation: S&P 500 index price

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22 Estimate the models of count data Dynamic models versus static model M&A may be persistent There are a wide range of autoregressive models in existence and there is currently no firmly established preferred model We present empirical results from a static Poisson regression model as well as a few dynamic models

23 Zeger and Qaqish (1988) Poisson INAR (p) regression model proposed by Brӓnnӓs (1995) Dynamic Poisson model with Pearson residual from a static model.

24 Monthly data Production data were collected on each region Gas production data were converted into oil equivalence Data are from EIA, various state statistical agencies, federal reserve (FRED) databases and so on Five regions were studied: Ark-La-Tex, Gulf Coast, Midcontinent, Permian and Rockies

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30 Our study represents one of the first to study the patterns in the M&A deals in the E&P sector of the U.S. oil and gas industry Broader stock market performance is not a good indicator of the M&A in the upstream sector of the O&G industry (negative coefficient not sure why, but there may be a reason?). Oil and gas prices and O&G output growth are better variables in affecting the M&A activities in the sectors. The capital market could affect the M&A positively as the capital market tightening makes less capital available, thus reducing the M&A activities. But a tightening capital market may lead to more M&A due to selling of the assets to finance E&P.

31 The M&A in E&P of O&G industry is defined differently from the traditional M&A It includes transactions involving assets and acreages Currently we are studying the dataset separating the transactions into different groups In addition, how the recent O&G price decline has impacted the M&A is interesting, but not included in the study Studies at the firm level may produce additional interesting results

32 Questions? Thanks!