Over the past few years, several companies have focused their efforts on a single unconventional play, many of which recently began trading in the public market. Their narrowed focuses were rewarded in the marketplace, resulting in an explosion in the number of E&P IPOs.

However, OPEC’s recent decision to maintain production sent oil prices and oil and gas equities’ valuations into a tailspin. The continued supply of foreign and domestic crude is testing the economic viability of North America’s unconventional liquids plays, and the resulting commodity market volatility has resulted in uncertainty across the oil and gas sector. A concurrently depressed energy equity market creates a unique opportunity for well-capitalized companies with access to capital to make high value corporate acquisitions.

While the current commodity price environment represents a dramatic shift in momentum within the oil and gas sector, sub-$50 oil is not unprecedented. Most recently in 2009, oil prices dipped below $40 after hitting record highs of over $140 just months prior, and gas prices hit their seven-year low.

Corporate transactions as a percentage of deal value and deal count grew considerably. Including the XTO/ExxonMobil merger, corporate transactions accounted for 77% of all upstream transaction value in 2009. In fact, there is a strong negative correlation between the number of corporate transactions as a percentage of total transactions in any given year and the average oil price in that year.

Depressed commodity prices made large corporate deals, like XTO/Exxon, significantly more actionable. Additionally, corporate transactions accounted for approximately 15% of all transaction count.

Further, examination of the timing of these transactions yields another interesting yet not surprising trend: increased oil price volatility reduces deal count. Using 2009 as the example, two-thirds of transactions occurred in the latter half of the year, after commodity prices had stabilized. If and when oil prices stabilize, even at depressed levels, corporate acquisitions could become a staple of M&A activity.

Although public exploration and production companies’ valuations have been significantly reduced, there are still a number of large operators with strong cash positions who may be willing to deploy capital to acquire companies at reduced prices.

Core positions within the top U.S. oil plays are economic in today’s price environment. If large companies have a long-term view on commodity prices, the current commodity price environment presents a historically rare opportunity for transformative acquisitions. Coincidentally, there are more potential acquisition targets now than there have been historically.

The recent increase in oil and gas IPOs and oil and gas valuations reduced the amount of acquisition opportunities available. Rather than looking to be acquired, private companies would take their companies public in an effort to capitalize on higher valuations in the public marketplace. However, supply shocks in the commodity markets have effectively halved valuations within the oil and gas sector, diminishing the market for E&P equities.

Although the collapse of oil prices has reduced investor confidence, depressed prices may create an opportunity for well-capitalized companies and companies with access to private capital to gain entry into premier oil resources at historically low valuations. Because the widely accepted strategy was single basin focus, companies looking to make strategic acquisitions can pick and choose basins in which they would like to gain entry or expand their interest.

Rather than purchasing a large asset base and subsequently selling off non-core assets, buyers can use corporate acquisitions as a vehicle to pick and choose which basins they like with unprecedented specificity.

Going forward, volatility in the commodity markets will continue to breed uncertainty in the oil and gas sector. Companies will continue to reduce capital budgets in an effort to weather the storm. Although the economic viability of many North American unconventional plays is challenged, well-positioned companies have a unique opportunity to strengthen their current asset portfolios, gain entry into new premier liquids resource plays, and create long-term shareholder value through strategic acquisitions.

—Buddy Carruth, Chase Machemehl, Anne Rutherford, John Ceviker, Tim Pish and Robert Urquhart, Scotia Waterous

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