HOUSTON – How will M&A activity shape up in the second half of the year?
It’s tough to predict with analysts wildly differing on where they think oil prices are headed.
Last month, Citi projected that oil prices will rise to $65 per barrel by the end of the year. Earlier this month, Goldman Sachs said oil prices could fall below $40 if OPEC doesn’t intervene or if U.S. inventories and rig counts don’t consistently drop.
“It’s affecting upstream as well as midstream and services companies,” Andrews Kurth Kenyon partner Michael O’Leary said.
New data from Mergermarket shows that M&A activity involving Texas businesses during the first half of 2017 was flat but healthy. Deal count was nearly identical to the same period in 2016, while deal value was up 27 percent.
As expected, the energy sector dominated corporate transactions.
The Texas Lawbook interviewed nearly a dozen of the leading corporate and private equity lawyers in the state to gauge their view on the M&A market for the first half of 2017 and what they forecast for the remainder of the year.
Here’s what they had to say:
Jones Day partner Jeffrey Schlegel of Houston said that, based on conversations with clients and others looking to enter, re-enter or increase their exposure to the oil and gas sector, there seems to be a lot more optimism based on the number of transactions that have cleared this year versus last year.
“I think there will be more of the same [in the second half],” Schlegel said.
Stability in oil prices in the first quarter gave companies “some comfort” in transacting, but once oil prices eased, that went away, said Justin Stolte, a partner in Gibson Dunn & Crutcher’s office in Houston.
Stolte says private equity has been active in 2017, but he notes that the asset class is different, with firms backing management teams with the intent of buying properties from major oil companies or independents, exploiting them and then selling them or taking them public when oil prices are better.
“The returns on those types of acquisitions likely aren’t going to be the same as when private equity came into unconventional boom,” he warns. “But there are a lot of funds that have raised capital that needs to be placed over the next 12 to 36 months.”
The fact that capital markets moved from hot to cool this summer sapped financing methods to pay for acquisitions, according to Chris LaFollette, a corporate partner in the Houston office of Akin Gump Strauss Hauer & Feld.
So, LaFollette expects private equity to become increasingly more active, particularly in joint ventures. She also foresees more consolidation among midstream, or infrastructure, companies.
So does O’Leary, who notes the high number of smaller midstream operators in areas where there’s not much drilling going on.
“There are a lot of orphans out there,” he said.
Locke Lord partner Bill Swanstrom also expects a lot of midstream activity, along with properties in basins other than the Permian changing hands, including the Eagle Ford, the Bakken in the Rockies and the SCOOP/STACK play in Oklahoma.
“Things have gotten pretty pricey in the Permian,” Swanstrom said. “People are looking for value propositions in other places.”
Swanstrom also thinks a lot of merchant power plants could be sold to private equity firms, as the capital markets aren’t adequately valuing them.
Deals are also beginning to happen in previously quiet secondary basins, said Sidley Austin partner David Asmus.
He points to the Haynesville in East Texas and northwest Louisiana, the Fayetteville in Arkansas and the Barnett in North Texas; internationally (in West Africa, East Africa and East and southeast Asia); and in the Gulf of Mexico, where costs are going down, leading to clear efficiency gains.
“Sellers have also realized that developed properties, rather than exploration, are more of a magnet, with the development risk already taken out of the system,” Asmus said.
Andy Calder, a Kirkland & Ellis partner who led Energy Future Holdings’ sale of Oncor last week to Berkshire Hathaway, thinks M&A activity is going to remain busy, with some nontraditional players who picked up assets in corporate restructurings becoming “keen to monetize.”
Others agree.
“All those coming out of bankruptcy will be monetizing their investments,” said Latham & Watkins partner Michael Dillard. “And those companies that can’t monetize assets will monetize their entire company.”
Dillard added that there are 10 to 12 special purpose acquisition companies, or SPAC’s, in the oil and gas sector looking for ways to deploy their money.
There will be more natural gas deals, such as the one by Jeffery Hildebrand of Hilcorp Energy, Dillard said. He also thinks there will be more disposing of non-core assets by the majors (Chevron, for one) and companies buying other companies.
“We’ll start seeing corporate transactions, whether it’s a bankrupt company beginning to trade or private equity sponsors who need liquidity,” he said. “We’re at that point of the cycle.”
Vinson & Elkins partner Keith Fullenweider also thinks there could be some strategic deals in the second half along the lines of EQT Corp.’s $8.2 billion purchase of Rice Energy last month as well as some infrastructure deals, including by private equity firms.
“There continues to be a lot of interest in the midstream [space],” he said.
Gibson Dunn’s Stolte expects companies to continue to sell assets or resurrect drilling joint ventures, known as drillcos, so they can generate cash they can’t raise in the capital markets. “We see private equity filling the void,” he said.
Not everyone sees smooth sailing ahead.
Skadden Arps partner Frank Bayouth isn’t optimistic about the second half absent a rebound in commodity prices. He thinks there will be M&A activity around restructured companies by equity holders who want to exit and midstream companies that need capital to build out infrastructure to get new oil and gas supplies to market.
“That is probably where most of the activity will be,” Bayouth said.