Consolidatioin Deferred | Russell T. Rudy Energy LLC
When crude oil prices first collapsed, many industry observers predicted an energy industry consolidation characterized by a large number of mergers and acquisitions (M&A). A recent article in “Rigzone” deals with the reasons why this has not happened. First, shale operators are enjoying unanticipated access to capital markets. Second, would be parties to M&A activity are unable to agree on valuations.
Oil and gas companies are having surprising success in issuing both equity and debt instruments to receptive investors. By relying on hedges, and cutting capital spending, operators have signaled that they are able to survive at current prices, and well positioned to do better when times inevitably get better. This has enabled them to reduce expensive short term debt and avoid further borrowing when interest rates increase. In fact, Thomson Reuters Deals Intelligence indicates that there have already been 29 domestic oil and gas equity deals this year. These transactions total $13.9 billion, the highest level in 15 years.
Conversely, oil companies which are looking to acquire vulnerable companies, and the targets themselves, cannot come to agreement as to what they are worth. Potential buyers think prices will fall further and consequently fear that transactions in the current environment would be premature. Target companies share a more optimistic view of the future. As long as capital markets are receptive to issues of debt and equity, these operators can delay, and possible avoid, M&As.
However, many analysts feel that a wave of M&A activity is inevitable. Osman Abib, head of oil and gas investing at Credit Suisse, observed “M&A” will follow. M&A tends to take a bit longer.
To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/137825/US .
