A&D Trends: Titanium Sponge

[Editor's note: A version of this story appears in the December 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Ladies and gentlemen, the state of oil and gas M&A is pouty.

Ill trade winds and politics are ap­parently kicking up an inconvenient amount of worry for executives. Upstream activity turned dismal in the third quarter while the XOP index of energy companies ticked up 10% from Oct. 8 through Nov. 12.

However, the index is still down since the year began by 17%. Nevertheless, not all the news is bad, or even rational.

Crème Brouillette. Dan Brouillette, President Donald Trump’s nominee for Energy Secretary, may be unknown out­side of Washington, D.C., but a profession­al, campaign-style video released on Nov. 8 certainly makes one thing clear: He’s into slow motion.

At just over a minute (it seems longer), Brouillette’s video shows him swaggering, wearing safety-goggles, walking up stairs, touring facilities and fist-bumping, all in slo-mo. But the video may play well to U.S. senators—average age, 62—who could ap­preciate the nod to the stop-motion anima­tion they enjoyed in their mid-30s.

Modus operandi. In a different moving picture, Encana Corp. is packing up its Ca­nadian home to move to the U.S., where it will rebrand under the name Ovintiv, caus­ing some speculation the company may be open to buyers.

“Is ‘Ovintiv’ Latin for ‘takeout candi­date?’” Bernstein Research wrote on Oct. 31. Staying in the north would have put Encana under the jurisdiction of the Invest­ment Canada Act, which allows the govern­ment to block foreign transactions.

Hippo inflation. Next time leasehold prices seem high, be thankful you’re not buying a tub. Bloomberg reported Nov. 12 that a bathtub shaped into a golden hippo sold at Christie’s for $4.3 million. The pre­vious owner paid $168,000 in 2006, sug­gesting a 2,500% return.

Spend a penny. Speaking of bathrooms, M&A values plunged to $37.5 billion in the third quarter, down 70% vs. third-quarter 2018, according to PwC’s quarterly analysis.

Upstream continued to make noise in the quarter with 58% of deal activity and 48% of transaction value.

PwC noted that fourth quarters are his­torically good for deals, but “whether that historic trend is enough to offset the gener­al downward slope of [oil and gas] deals in 2019 remains to be seen.”

Mahogany vs. balsa. Taking a larger view of the industry, Wood Mackenzie said that while global upstream M&A is shrink­ing, E&Ps starved of exploration capital want to reshape their portfolios “for resil­ience in the face of long-term demand.”

“On the face of it this sounds like a par­adox, but it is because the role of M&A in adding new barrels to company portfoli­os—in part because of a sharp fall in explo­ration—has become more important,” said Angus Rodger, Wood Mackenzie’s research director.

He noted that from 2005 to 2014, 37% of the new resource added to upstream portfo­lios came from M&A.

“In the last three years (2015 to 2018), this has risen to 46%. Yet at the same time global M&A activity declined since 2014,” he said.

That contrasts with executives who are increasingly gloomy about M&A prospects in 2020, Texas Lawyer magazine reported on Nov. 7. A survey by law firm Dykema Gossett found that about 32% of CEOs and CFOs are generally pessimistic about M&A compared to 15% a year ago.

“The two greatest threats to M&A activity over the next 12 months are trade tensions with China and U.S. political uncertainty,” the report said.

Unsettle right in. Perhaps the most con­sistently picked on Trump appointee since Attorney General Jeff Sessions is Federal Reserve chair Jerome Powell—a public berating that he clearly deserves for taking the job.

On Nov. 12, at a speech to the Economic Club of New York, the president said major stock indices would be up “another 25%” if his pick to head the Federal Reserve had been more of a team player.

But Trump’s trade war is more often cit­ed by economists as the primary drag of productivity.

Starting in 2018, tariffs were placed on so­lar panels, washing machines, steel (though not titanium sponge) and aluminum before a rapid escalation of customs duties with China, which retaliated.

Until the trade war is settled, a slice of executives appears reluctant to make deals, particularly since a bad economy makes for lower oil prices. During the president’s New York speech, Trump said the U.S. and China are “close” to a deal. As oil and gas dealmakers might say, “Show me the PSA.”