Midstream deals dominate today’s A&D headlines, but Moody’s Investor Service is predicting that deal-making opportunities for E&P companies will grow stronger through 2016.
According to Terry Marshall, senior vice president of Moody’s, M&A activity in the E&P sector has been quiet this year despite a weak price environment and cash flow, liquidity and developmental challenges. “The few deals so far this year have involved strong companies with good assets that strengthen the asset bases of the acquiring companies,” he said in a July 15 news release.
Marshall cited such deals as Royal Dutch Shell’s (RDS.A) proposed $69.8 billion acquisition of BG Group Plc in April and Noble Energy Inc.’s (NBL) proposed $3.9 billion acquisition of Rosetta Resources Inc. (ROSE) in May.
High bid/ask spreads have been a major impediment to M&A deal-making, he said, citing fluctuating oil prices from the low $40s to the $60s and in between. Marshall said, “Oil prices have limited room to rise from here, given global oversupply that is unlikely to abate through at least mid-2017.”
Predatory acquisitions of distressed companies, which Marshall calls “a common impetus for M&A,” have yet to become a trend. Such acquisitions can leave buyers with less desirable assets and a heavy debt burden. “Acquirers of distressed companies will typically wait until they can buy the target out of bankruptcy or strike a deal subject to a pre-acquisition distressed exchange,” he said.
The number of distressed companies is lower than might be expected, Marshall said, adding that 2015 hedge positions have protected E&P cash flow and contracted backlogs have helped drillers.
Some companies have bolstered liquidity in an active second-lien note market. He cited SandRidge Energy Inc. (SD), which raised $1.25 billion.
“Stronger companies have improved liquidity by accessing the equity markets, paying down debt and funding negative free cash flow.” Marshall said. This includes payments of large dividends for companies such as Cenovus Energy Inc. (CVE).
Moody’s expects M&A activity in the oilfield services industry to pick up with asset dispositions in Halliburton Co.’s (HAL) pending $34.6 billion acquisition of Baker Hughes Inc. (BHI). Meanwhile, Marshall said that “the offshore rig market needs asset-scrapping, not consolidation, to deal with a significant rig oversupply.”
In conclusion, the Moody’s report said that the North American midstream sector will remain open to M&A activity amid waning opportunities for organic growth as demand for expanding transportation cools.
Contact the author, Mike Madere, at mmadere@hartenergy.com.
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