Energy Companies: Where’s the M&A? – 6/16/16

There’s no doubt the energy industry went bust when oil prices started plummeting, so where are all the M&A deals? Normally, a downturn would have investors on the edge of their seats looking to bu cheap assets, but the wave of takeovers has yet to come.

The low price of oil is partly to blame since it is still less than half of its 2014 level making it hard for companies to pay off debts let alone go on a spending spree. Only the truly large businesses can afford to make acquisitions and even they are careful to make only the most justifiable purchases.

In addition to a lack of spending money on the buyer side, you have a lot of distressed companies that just aren’t worth the trouble. Many companies went into debt during the shale-oil boom to grow only to come out of the price collapse with devalued holdings and little cash on hand. Their debt and lack of cash make them unpalatable to most parties.

“It’s like buying a home with a big mortgage on it. There isn’t a lot of equity left there,” Exxon chief Rex Tillerson said in March.

Even companies that can be bought without financial baggage are staying independent for now. The same efficiency that allowed shale-oil drillers to survive the glut far longer than analysts expected is making buyouts less likely as there is less of an argument for synergies. While low share prices might look attractive when compared only to what they used to be, a 30% premium as part of a buyout would kill the value of most deals since its near impossible for already lean companies to get more efficient with just a change in management.

M&A activity may come if oil prices rise above $50 a barrel again and stay there. However, the recent fall back below $50 following uncertainty about the return of shale-oil and the Brexit bodes ill for any near-term deals.

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