In debt and out of cash-------it's the common cold equivalent of what ails the O & G industry
Persistently low commodity prices and lack of market confidence is delaying an expected uptick in oil and gas mergers and acquisitions (M&A) across all sectors, Deloitte LLP reports in a recent study.
During the first half of 2016, Deloitte found that the number of M&A deals reached its lowest total in five years. In the first six months of 2012, 385 deals had a value of $127.37 billion. Fast forward to the same time frame in 2016, and 198 deals totaled $85.66 billion.
The “lower for longer” philosophy of energy investors during the last 18 months has given way to questions of exactly how much lower and how much longer. Essentially, the second year of the commodity price downturn has found lenders less willing to fund deals, Deloitte wrote in “Oil & Gas Mergers and Acquisitions Report – Mid-Year 2016: Looking for a Restart.”
Heading into the second half of the year, more exploration and production (E&P) companies, as well as their service providers, are expected to file for bankruptcy, Deloitte said. The industry’s revival will rely on several factors: stable commodity prices, open debt markets and global economic growth.
“I think the numbers tell a very straightforward story,” said Andrew Slaughter, executive director at the Deloitte Center for Energy Solutions. “Even if you look across all of the sectors, there’s still an awful lot of caution and uncertainty around the ‘where, when, how fast and how far’ the recovery will go. If you compare this downturn with historical downturns, it’s lasted a lot longer. Nobody really anticipated it was going to last as long as this.”
Slaughter told Rigzone that boardrooms are in a position that members don’t see past the next quarter and many have yet to yield an increase in cash flow. Plus, most companies are still leveraged from the downturn.
“You’ve got buyers not sure how to value assets and how to pick out the best assets. Nobody is really sure about when to recognize a sustainable recovery. I think there are a lot of impediments to the uptick in the deal flow that most people anticipated,” he said.
Still, Slaughter said the seeds of recovery do exist with some erosion in the inventories that have pushed down commodity prices.
“It’s taking quite a while and we’re not going to get a tsunami of consolidation or asset rationalization in the next several months,” he said. “It’s going to be slow. It’s going to be cautious and I think there will need to be a lot clearer perception across the market about a higher price level is here to stay, the supply-demand balance is more in historical territory, and there is room to drill up more prospects than there is today.”
The key finding of Deloitte’s research is that the industry’s M&A will remain in a holding pattern until market uncertainty plays out.
“It will take a much stronger set of signals that the recovery is underway and is sustainable. I don’t think a brief price spike is going to do it. We all want to see a sustainable price recovery, $10, $15 or $20 above where we are today to really kick things off again,” he said.
Dozens of Upstream Bankruptcies
In the upstream sector, there was a slight increase in the number of deals from 2015, but the value of those deals was less than the previous year’s first half. Of the 81 upstream bankruptcies since 2014 around the world, 77 have been producers, which may yield more deals through the rest of the year.
Of the 136 upstream deals covered, 72 of them accounted for 45 percent of the total deal value. The largest among them were the Suncor Energy purchase of Canadian Oil Sands Ltd. at $4.5 billion and Range Resources Corp.’s buy of Memorial Resource Development for $4.4 billion.
Big Deals in Midstream
The midstream sector has offered some positive news, containing three of the largest deals to date – each of which included companies based outside of the United States.
The midstream deal between TransCanada and Columbia Pipeline Group was the second largest of all oil and gas subsectors, accounting for 61 percent of all deal value. In total, less than two dozen midstream deals generated $20 billion during the first six months of 2016.
Oilfield Services Trouble
Although oilfield services (OFS) lead the lay-offs in energy both in timing and quantity, only four of the 81 oil and gas bankruptcies in the first half have claimed OFS companies. Deloitte found that the number was held in check by the fact smaller companies with more localized OFS liquidated their assets and closed their doors outside of the bankruptcy courts.
As a group, OFS saw 21 deals with a total value of $16.8 billion during the first half of the year.
Downstream’s Fewer Deals, Fewer Dollars
Deloitte found that in the first half of 2016, the downstream sector had less activity than in the two previous years. In total, there were nine corporate deals worth more than $1.8 billion and 10 assets sales valued at $4.1 billion. More than half – 11 of 20 – of the deals involved companies outside of the United States and most focused on logistics and distribution instead of refineries, Deloitte said.
ArcLight Capital Partners was a mover in the downstream space, scooping up TransMontaigne GP and NGL Energy Partners. In addition, ArcLight has made four other purchases in the last 12 months, which Deloitte said sends a message the company is developing an infrastructure acquisition and development strategy.
Still, downstream as a sector is strong relative to the others. As Slaughter explained, downstream has a different business cycle than that of upstream and midstream.
“Downstream margins have been good, and so that is a trigger for deal-making. If you have a company with a portfolio of downstream assets that they want to high-grade, then a high-margin environment is probably a good time to do that because it means their maybe second or third-tier assets are attractive to other buyers and the valuations will still be pretty healthy,” he said.
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Replies to This Discussion
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Permalink Reply by 2kh5ftrhxwsvz on
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Blah blah blah blah blah blah blah.....CHK rocks and is poised for a meteoric rise....buy out looking like a STRONG possibility.....why all the angst Paul?....are you a failed businessman who got rolled by the suppliers and banks.....you and Hale should start Crabby Cruise Line....start your own vay cay packages for other curmudgeons....lmao at you bitterman
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Permalink Reply by Paul Butler on
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You couldn't be more wrong about me.
About CHK: all this shedding/restructuring--it's almost snake like molting.
I'm thinking we are seeing the Balance Sheet getting cleaned up as part of some pre-petition plan.
Next, a pre-packaged bankruptcy, the carcass, in large part, being sold off.
In a fairly large deal--the bankruptcy detritus, not having been sold, is acquired by some suckers.
Probably suckers from Colorado.
I'm thinking the Common, at the least, is toast.
I'm not seeing 10 bucks Mike.
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You're high....this company is NOT going bk....you're more apt to be credited with saying something intelligent than chk going broke....dip back into fantasy land crabby man
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