We often highlight articles from our customers that would be interesting and relevant to the Firmex community. We hope you enjoy this in-depth report by Mike Rosendahl of PCE Companies, on M&A activity in the natural gas sector.
The abundance of natural gas in the U.S. has resulted in a number of interesting circumstances. First, the supply of natural gas has increased to the point where storage facilities are close to capacity. Second, due to high levels of supply prices have dropped dramatically, which has resulted in a greater proportion of the U.S.’s power generation being derived from this fuel. Third, prices are expected to remain low due to the high levels of supply that have yet to be tapped. Fourth, the infrastructure to transport the natural gas from the point of extraction to the end user is still being built. Fifth, natural gas is accepted as a cleaner fuel for power generation. This confluence of factors has created depressed prices for natural gas, but the segments that use and support the extraction and use of natural gas are experiencing exceptional growth not only in revenues and profits, but also merger and acquisition activity.
The price of natural has dropped precipitously since its recent peak in 2008. The lower cost was driven in part, by decreasing demand during the recession, but the primary factor was the abundant resources that were being exploited through exploration utilizing hydraulic fracturing or “fracking.” Access to previously inaccessible or expensive resources created a fundamental change in the way power is generated in the U.S. This shift in the mix of resources is expected to continue going forward. While the cost per BTU has dropped significantly from its peak there have been numerous beneficiaries that have reaped benefits from the low price point.
Price of Natural Gas ($’s per Million BTU)
Source: St. Louis Federal Reserve
Over the last ten years, the U.S. has grown to be more dependent on natural gas with the percentage of power produced from this fuel increasing from 17% to 25% and the trend continues to be positive. Tolerance for coal and nuclear power has decreased as consumers focus on cleaner and safer types of power production. Renewable energy remains popular, but currently relies on subsidies from the federal government that are set to expire at the end 2012 with extension not expected until the end of this year. When these factors are combined natural gas becomes the beneficiary.
Percentage of U.S. Power Production from Natural Gas
Source: U.S. Energy Information Administration
Due to the high levels of capital outlays, investor and acquirer focus on companies that benefit from growth in the natural gas sector continues to expand. Strategic and financial acquirers are actively pursuing transaction in this space with total transaction volume increasing since the recession in 2009. Volume is expected to remain strong in this sector due to the positive factors listed above, which should lead to a strong return for business owners. Strategic buyers are leading the way, but financial acquirers are increasing their activity in the space. In addition, valuation multiples are high and vary across the type of service or product being offered, but the data is clear that a premium is being paid to companies that serve this sector.
Natural Gas Related Transactions
Source: Capital IQ
It is not very often that a combination of factors come together to favor one particular segment of an industry, but natural gas is one of those rare instances. Companies that create a strong position in this sector will benefit for years to come as investment continues to expand and the industry grows. The result will be higher revenues and profits in with the potential for a higher valuation when an exit is contemplated.
Please contact Mike Rosendahl at 407-621-2136 or email mrosendahl@pcecompanies.com if you would like to discuss this article.
