Heating up Wall Street

Energy M&A: Wall Street has always loved the fees generated by deal-crazy oilmen. But the recent flurry of energy industry hook-ups — $130 billion so far this year and counting — is once again making them the most valuable clients for the world’s merger advisers. Bankers in the oil patch are likely to remain in high demand even if energy prices stumble.

Oil and gas producers often jostle with financial services firms for the top sector spot in merger activity. Pricey oil, at over $80 a barrel today, may be helping give the energy sector the edge by boosting valuations. So far this year the industry spawned 46 transactions worth $500 million or above, racing past financials with just 31 deals, according to Thomson Reuters. But resurgent energy prices are only part of the story.

After all, natural gas - which has been at the epicenter of much deal-making - still languishes at less than a third its 2005 peak. Instead, the recent flurry of activity is due mainly to a race to lock up resources. With 87 percent of the world’s oil reserves controlled by foreign governments or national champions, big private energy companies are finding it harder to replace lost production. Between 2002 and 2008 Exxon Mobil managed to replenish just 39 percent of production through fresh exploration. BP and ConocoPhillips did only slightly better at 57 percent and 49 percent respectively. This has put the burden squarely on deal-making.

Merger advisers also owe a debt of gratitude to China, which is attempting to feed surging domestic demand for energy. Acquisitions by Chinese national oil companies made up nearly 40 percent of the value of deals outside the United States in the first quarter of the year, according to IHS Herold. Bidding pressure from deep-pocketed Chinese companies - such as Sinopec’s purchase of a chunk of Conoco’s business in Canada’s oil sands this week - pushes up the value of deals, to the delight of bankers. In addition, as old-style cheap oil gets harder to find, once-fringe resources are attracting ever greater attention - including gas shale, oil sands and sub-salt oil. The greater technical challenge of extracting these hoards helps explain the recent wave of deals in the oil services sector, including Schlumberger’s pending $11 billion takeover of Smith International .

The widening contango in oil - with near-term contracts trading at a discount to longer dated ones - may point to an ominous glut. But with so many broad trends driving energy deals, even a retreat in the price of the black stuff looks unlikely to end the party for bankers.