Falling Natural Gas Prices Put the Brakes on Deals; A sharp drop in fuel

prices has delayed or spiked some private-equity transactions involving gas

producers - Correction Appended
WSJ Pro Private Equity
February 25, 2023

Correction Appended

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Section: WSJ PRO

Length: 726 words
Byline: By Luis Garcia

Body

Plunging prices for natural gas have spoiled what looked like a promising period of deal making involving energy
companies and private-equity firms in the sector.

Gas prices in U.S. futures markets have fallen by nearly two thirds since mid-December and this week reached the
lowest level since early in the coronavirus pandemic in 2020 as a mild winter sapped demand and supply remains
robust, The Wall Street Journal has reported.

The slump put on hold or derailed negotiations for a number of deals among gas producers, including some backed
by private equity, as buyers reduced offers and sellers stood their ground, industry lawyers and investment bankers
said.

"With gas prices falling and without a clear understanding of where they're going to end up, it doesn't give people
confidence when they're trying to buy," said Sarah McLean, a Shearman & Sterling LLP partner in the law firm's
private-equity and mergers-and-acquisitions practices.

More than 15 oil-and-gas companies remain up for sale in North America with a combined value of more than $40
billion, according to Rystad Energy AS, an energy-focused research company. While deals for companies that
produce mostly oil are more likely to go ahead, those involving gas producers may find it hard to get to the finish
line, said Muhammad Laghari, a senior managing director in the energy-investment banking practice of
Guggenheim Securities.

"I am well aware of multiple transactions that were in the works and stalled because gas prices have gone down,"
Mr. Laghari said. "There were a lot of exits planned for this year and I think many of those may get delayed."
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Falling Natural Gas Prices Put the Brakes on Deals; A sharp drop in fuel prices has delayed or spiked some
private-equity transactions involving gas producers ....

One victim: The acquisition of Quantum Energy Partners-backed gas producer Rockcliff Energy LLC by TG Natural
Resources LLC, a Tokyo Gas Co. unit. Negotiators were near a $4.6 billion deal, including debt, that would have
expanded the buyer's operations in the Haynesville Shale region across East Texas and Louisiana, Reuters
reported in early January. By that time, gas prices had already fallen by 46% from their mid-December levels.

"It's officially dead," a person familiar with the negotiations said of the deal.

Private-equity firm Aethon Energy Management also has reportedly sought to sell its Haynesville gas assets, but
hasn't so far. Meanwhile, Ascent Resources LLC, a gas producer that operates in Ohio's Utica shale region and is
backed by private-equity firms Energy Minerals Group and First Reserve, held merger talks and began preparations
for an initial public offering last year, according to news reports. Ascent remains a private company and hasn't
merged with any other.

The drop in the fuel prices represents a reversal of fortune both for private-equity firms hoping to score profitable
sales of gas producers and for potential buyers eager to expand in an increasingly consolidated shale industry, deal
lawyers said.

After a steep rise in commodity prices following the pandemic led to a series of private-equity exits in the
Haynesville Shale in 2021, competition for the gas producers that remained on the block intensified, the lawyers
said. Adding to the momentum, Russia's invasion of Ukraine prompted a further increase in natural gas prices to
more than $9 per million British thermal units in August, the highest in 14 years.

Gas demand also got some help when the European Union in July voted to label gas a "green" fuel, the lawyers
said.

"For a while gas was sort of king in the sense that prices were high and gas is viewed as clean in many respects,"
Ms. McLean said.

In addition to the recent decline in gas prices, rising interest rates and supply-chain inflation have complicated deal
making because financing gets more expensive and operating costs rise, putting pressure on profits, Guggenheim's
Mr. Laghari said.

"While buyers may take a certain strategic view and see through the short-term volatility of gas prices, a bigger
issue is financing," he said.

Deal activity is expected to regain steam after gas prices stabilize at a new, likely lower, level than last year, said
Atul Raina, a Rystad analyst who focuses on oil-and-gas exploration and production.

"When you try to link gas prices to [mergers and acquisitions], what is critical is having a consensus between
buyers and sellers and that is only possible when those prices are stable," he said.

Write to Luis Garcia at luis.garcia@wsj.com

Notes

PUBLISHER: Dow Jones & Company, Inc. - Enterprise WSJ

Correction

Corrections & Amplifications

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Falling Natural Gas Prices Put the Brakes on Deals; A sharp drop in fuel prices has delayed or spiked some
private-equity transactions involving gas producers ....

Gas prices reached their lowest level since mid-2020 this week. A previous version of this article incorrectly said
last week. (Corrected Feb. 24) Separately, Louisiana was misspelled as Lousiana in an earlier version of this
article. (Corrected Feb. 27)

Load-Date: February 28, 2023

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