Amidst addresses by CEO’s, oil ministers and policy makers, there was plenty of M&A talk among investment bankers, private equity executives and analysts at energy conference CERAWeek by IHS Markit in Houston this week. The consensus? That there just aren’t a lot of deals happening right now due to investor disinterest in the sector.
Yes, as many pointed out, there were several strategic mergers among exploration and production companies last year: Concho-RSP Permian, Encana-Newfield, Diamondback-Energen, Denbury-Penn Virginia, Chesapeake-Wildhorse and Cimarex-Resolute. Together, they were valued at $31.5 billion.
But so far this year, M&A and the A&D market (acquisitions and divestitures) have been dead, despite good deals out there due to lower commodity prices. Negative investor response to many of the mergers announced last year made management teams leery of doing deals themselves.
“The traditional cash A&D market is very soft – as soft as we’ve seen in a decade, at a time when you should be seeing a period of consolidation,” Bobby Tudor, chairman of Tudor, Pickering, Holt, said at a breakfast panel on Wednesday. “The sector is so unloved right now and the ability to do something as a CEO is very limited.”
So what kinds of deals are happening?
With the initial public offering market pretty much dead to new exploration and production company issues, Tudor said private equity firms are instead mushing their portfolio companies together or reaching out to buy other private companies with the hope that they can sell them one day to the big integrated oil and gas companies. “Scale matters – and will attract the majors,” he said.
In the meantime, E&P companies continue to try to generate free cash flow, as investors are now demanding, while reducing debt they piled on during better times. At the same time, they also are trying to return capital to shareholders via distributions and stock buybacks as well as show some incremental production growth.
“We’re going through a major period of adjustment,” Credit Suisse investment banker Osmar Abib of Houston said on a panel. “The market doesn’t have the conviction that oil prices will go much higher, so the focus has been on business models that are attractive, even with low oil prices.”
Private equity firms seem ready to jump in given cheap valuations. “This is a very attractive time to invest, especially in conventionals,” said Marcel van Poecke, a managing director at Carlyle.
Nate Walton, a partner and co-head of North American private equity at Ares, agrees: “They’ve been underperforming long enough. There are plenty of companies with attractive paths forward.”
Like Walton, Blackstone senior managing director David Foley has been investing more in pipelines over the last few years to get the abundant amount of oil and natural gas from the Permian Basin to U.S. and overseas markets. “Next are gathering systems,” he said.
NGP partner Bob Edwards said the firm is happy to continue backing management teams that are buying and developing properties with the intent of passing them on. “That’s the food chain,” he said. “We’re the farm league for the majors.”
Credit Suisse’s Abib thinks the IPO market could open up. After his panel, he told The Texas Lawbook that out of the 20 IPO candidates he had in-house, more than 10 could still go public, mostly in the upstream and services subsectors of the industry but a few in the midstream. “There are some quality IPO’s in the pipeline,” he said. “I’m reasonably optimistic.”