© 2014 The Texas Lawbook.
By Mark Curriden – (November 4) – The rapidly declining price of oil is having a negative impact on mergers, acquisitions and joint ventures in the oil patch.
Industry insiders say that if crude prices continue to fall and then stay below $75 a barrel for an extended period of time, some highly leveraged energy companies will be forced to sell assets at fire sale prices in order to raise cash.
More than a dozen Texas-based energy M&A lawyers and investment bankers say they have personally witnessed one or more proposed deals halted during the past two weeks because of the uncertainty about the future price of crude or the drop in the stock price of one of the oil and gas companies involved in the proposed transactions.
M&A in Texas – fueled by a nearly unquenchable thirst for investment in the oil and gas sector – was on a record pace during the first three quarters of 2014.
But new deals in the pipeline started slowing dramatically during the past few weeks.
Lawyers and investment bankers say the shift, which most of them describe at this point as a “pause,” came just as oil prices started to dramatically decline, plummeting to $77 a barrel Tuesday – the lowest in more than four years.
“Anytime we have sharply rising or falling oil prices, we see this kind of pull back,” said Steve Davis, an oil and gas lawyer at Akin Gump in Houston.
Davis said that he’s heard from investment bankers that “clients are pulling back properties” because they can no longer get their asking prices.
Two prominent investment bankers, speaking on the condition that they are not identified, said that three separate potential deals – all in the early stages of negotiation – were called off this past weekend because of a disagreement on the future price of oil. The bankers declined to identify the companies but said two are Houston-based and one is in North Texas. An Oklahoma E&P was also involved, they said.
“As soon as the price started fluctuating significantly a couple weeks ago, we started seeing deals slowing down,” said Robin Fredrickson, an oil and gas lawyer in Houston with Latham & Watkins.
“The deals that are already signed will close, but I predict we are going to see very little new M&A among exploration and production companies during the next two months,” Fredrickson said. “But then, we will see a massive number of deals right after that.”
Holt Foster, an energy lawyer at Thompson & Knight in Dallas, said that many oil and gas E&P companies are “dipping their toes in the water” of deals that they would have pursued more aggressively just a month or so ago.
“Right now, everyone is just trying to figure out what is going on,” Foster said.
The slowdown appears to have hit upstream companies more than midstream. There have been nine billion-dollar-plus deals M&A deals announced during the past nine days, but seven of them involve pipeline firms.
The deals are falling apart because of a “growing disconnect between the buyers and the sellers” of assets, according to Cliff Vrielink, a corporate M&A partner at Sidley Austin in Houston.
“Buyers of assets are arguing that oil prices will be at $80 or $75 and sellers contend its going back to $100,” Vrielink says. “We have clearly seen buyers of assets get more conservative during the past few weeks.”
The decline in oil prices has hit the oil company stock prices, too.
“One deal fell apart because the stock price of the acquirer has been hit pretty hard – down 20 to 30 percent thanks to the decline in oil prices,” Vrielink said. “The company just decided to put deals on hold until the value returns.”
Foster said that “$80 a barrel is the magic number” because that is the bottom price many of these companies use in their accounting models.
“It is extremely expensive to drill and if oil drops below $80 for a sustained period, many production companies will lay down the rigs,” he said. “If oil drops to below $75, we could see some fire sales.”
Foster and others say that many oil and gas companies are severely leveraged and the debt is guaranteed by the oil in the ground.
“Upstream companies are borrowing based on reserves and if the commodity price falls significantly, creditors will think those companies are over-leveraged,” said Vrielink. “Another deal going on right now is on shaky ground because of that very reason of over-leverage.”
© 2014 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected by specific licensing agreements with our subscribers and under federal copyright laws. Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our goal is content that is 100% true and accurate. Thank you.