Neither Here Nor There: Deals To Rise In 2016, Regardless Of Oil Price

Regardless of where the oil price ends up this year, analysts are predicting a ramp up in M&A activity for 2016.

Stagnating, low oil prices will open a flood of distressed sales and consolidation. A recovery sets off a race to secure deals as inflation sets in, Wood Mackenzie said in a report.

Waiting in the wings, private equity firms are ready to swoop down and take advantage of the counter-cyclical opportunities with the abundant amount of capital they’ve tucked away.

Most analysts agree: M&A prospects will be better than what the industry saw in 2015.

“Whether oil prices move up, down or nowhere at all in 2016, pressure to act will build on both buyers and sellers,” said Luke Parker, corporate analysis research director for Wood Mackenzie, in the report.

Confirming what the industry plays already intuited, analysis revealed that 2015 was the slowest year for upstream oil and gas transactions in more than a decade.

Deal count and value remained in the basement: average monthly deal counts fell by more than a third compared with the preceding 24 months. And deal values collapsed by two thirds in 2015. Companies announced 14 deals valued at more than $1 billion dollars compared with 46 in 2014.

The single bright spot was Royal Dutch Shell Plc’s (NYSE: RDS.A) takeover of BG Group Plc for $82 billion, which is expected to close in February.

Pressure

Financial pressures will lead to different drivers behind deals and different types of deals, Parker said.

“Mounting distress will force more companies to market: balance sheets will become even more stretched without asset sales to balance the books,” he said.

Tudor, Pickering, Holt & Co. (TPH) said in December that the A&D market is likely to be ripe with transactions as companies try to divest noncore assets to patch balance cash flow holes.

Related:
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"We may see some weakness on bid pricing, but year to date, valuations for non-northeast gas and core oil assets have been reasonable and in some cases excellent," TPH said.

Private equity seems to have an endless appetite for deals at the right price. "Investors will wait to see the outcome of sales before banking on cash in the door given growing uncertainty in the face of falling commodity prices" TPH said.

Northeast company returns point to need for slower growth, which could lead to M&A and a healthier gas market by 2017, the firm said.

After the market sent NGL and spot condensate prices down, Northeast-levered equities fell 53%.

"With the A&D market likely to see an acceleration in asset sales in 2016, we think operators who need to backfill takeaway capacity could look to buy uncommitted production vs. plowing capital into the ground while consolidating the industry and buying undeveloped acreage at attractive valuations," TPH said.

Financing options are drying up for most companies, though. “Debt and equity investors are unlikely to be as welcoming as they were in the first half of 2015 when expectations were for a quick rebound in prices,” Parker said.

Wood Mackenzie analysts warn that the number of vulnerable players is likely to increase this year.

“While the top tier of International Oil Companies (IOCs) can largely take action to ride out a further year of low prices, the next tier down may have fewer options. Deeper strategic action, including asset sales, will be needed,” Parker said.

The ability to drive the pace of capex spend will be critical for companies in financial trouble, said Greg Aitken, principal analyst of M&A for Wood Mackenzie, in the report.

“Living within cash flow will be the priority for E&P companies and some capital intensive development assets will have to be sold, almost regardless of price,” Aitken said.

Likely Buyers

For likely buyers in 2016, the industry can look no further than the private equity sector.

Private equity has about $40- to $100 billion of funds earmarked for investment in oil and gas, Parker said. Much of the capital is specifically raised to take advantage of the low price environment opportunities, which were scarce in 2015.

“However, 2016 should provide more [opportunities] and private equity is still well-capitalized to take advantage,” he said.

Wood Mackenzie calculates the oil market will tighten in 2016, eventually boosting prices in the second half. The firm forecasts Brent will rise to more than $65 per barrel in the fourth quarter of 2016.

“As we saw in second-quarter 2015, when sentiment takes hold that oil prices are on the path to recovery, M&A activity can pick-up quickly,” Aitken said.

First mover advantage is crucial when this happens to catch the next up-cycle, he said.

“At the moment, companies are focused on survival, but this could quickly shift back to growth, in a high oil price environment,” he said.

Contact the author, Emily Moser, at emoser@hartenergy.com.