© 2016 The Texas Lawbook.
By Kerry Curry
(July 26) – Merger-and-acquisition activity crawled along during the first half of 2016, but leading financial advisers in Texas predict an acceleration of deal flow and size before the end of year.
Financial advisers from KPMG, Tudor Pickering Holt, Grant Thornton and Anderson King Energy say they expect private equity firms and traditional investors in the oil patch to return to the deal market later after sitting on the sidelines for the past 18 months.
“Texas has the most valuable oil & gas real estate on the planet,” says Maynard Holt, co-president and co-head of investment banking at Tudor Pickering Holt & Co., an energy investment and merchant banking firm in Houston. “It is to oil and gas what Manhattan is to the real estate market.”
The nation’s most prolific oil play, the Permian Basin in West Texas, remains a hot commodity, despite oil prices being far lower than they were two years ago.
Yet the basin is getting attractive valuations that Jon Dormer, managing partner at Dallas-based Anderson King Energy Consultants, calls “a little bit surprising given where commodity prices are, but it just shows you the quality and the future inventory of the opportunities there.” Anderson King Energy specializes in upstream M&A.
While the transaction value has dropped this year and deal flow is slow, some advisers predict a more active fourth quarter for Texas M&A.
“If you look at this from a deal perspective, private equity is down this year relative to 2015, ” says Sal Fira, a partner and practice leader in Grant Thornton’s Transaction Advisory Services practice. Fira advises on private equity transactions in a variety of sectors, including consumer industrial products.
“We’ve seen a pause in the marketplace in Texas M&A, and this past quarter we’ve felt it even more so than we have in prior years,” he says. “We’ve had what you’d characterize as a very active M&A market for four, five, six years running – in Texas and throughout the country. There comes a point when there is a natural pause.”
Stabilized oil prices should get transactions in the energy sector moving again by the fourth quarter, he and others say.
According to Anderson King Energy, U.S. upstream deals averaged between $30 billion and $40 billion in transaction value per quarter in 2014 before the price of oil dropped. Last year, the U.S. deals averaged between $15 billion and $30 billion per quarter. This year, it’s roughly similar to 2015, about $20 billion per quarter, says Randy King, managing director at Anderson King Energy.
Fewer Distressed Deals Than Expected
So far, a fairly small percentage of the energy M&A deals Anderson King Energy is advising on since the downturn are coming out of bankruptcy proceedings, says Dormer. Companies they’ve advised have been able to achieve a reasonable value and avoid the expense and time of bankruptcy.
John Chapman, who specializes in restructuring at TPH, says companies in bankruptcy would rather reorganize than sell. While PE firms desire to buy assets out of bankruptcy on the cheap, the distressed companies in bankruptcy haven’t always been the one’s with the best assets, and creditors involved in the bankruptcy cases may be also unwilling to sell at today’s prices, according to Chapman.
“We haven’t seen as much distressed M&A as you might expect, but there are a number of fairly high profile cases where assets are being sold,” he says.
Not all oil & gas companies have avoided bankruptcy. Since the beginning of 2015, 43 energy companies have filed for bankruptcy protection in Texas – the most of any state or Canada as of June 30, according to the Haynes and Boone Oil Patch Bankruptcy Monitor.
Where We Came From
Two years ago, the nation had reached a high in oil prices. It was a peak year for many companies doing M&A work in the energy sector. There were some huge deals that year. In one of the biggest deals of 2014, Calgary-based EnCana bought Fort Worth-based Athlon Energy for $7 billion in an all-cash deal, signaling its entrance into the Permian Basin in a big way.
By late 2014, however, oil prices had begun their decline, dropping into the $70s after the November OPEC meeting. By that point, transactions had stopped as companies waited to see what would happen. Some thought prices would bounce back to $90, while others thought they would drop to $50.
“It really killed the deal market,” says TPH’s Holt. From November 2014 to February 2015, virtually no M&A deals occurred as companies battened down the hatches.
M&A financial advisers during that time helped businesses look at what they needed to do to survive, whether that meant selling off assets or filing for bankruptcy protection.
Where Things Are Headed
Even though the price of oil is lower today than it was in late 2014 and early 2015 when activity temporarily came to a halt, there is now more agreement about where the market is headed. And that is bringing buyers and sellers back to the bargaining table.
Sean Murphy, a principal and partner at KPMG’s Dallas office, says that even though deal volume is down about 10% to 15% year-over-year, KPMG’s hours and revenues are up by about the same amount.
“The private equity mantra of trying to spend the capital means you’ve got folks that are more aggressively chasing deals,” he says. “I don’t mean spending like drunken sailors. I mean they are actively participating in auctions.
“They might even be front-loading their diligence efforts and spending money to do that diligence work on transactions where it is less certain for them because they either like the transaction … or they realize they have a limited time period to deploy that capital,” Murphy says.
“We feel like we are busier than we’ve ever been, not only supporting clients on the buy side but also with our sell-side activities,” he says.
Holt, meanwhile, predicts that the number of deals will go down going forward, but the size of the deals will go up.
“There’s a part of Texas and New Mexico called the Delaware Basin, it’s part of the broader, greater Permian, but it is the “new neighborhood” of the Permian, and it has lit up with activity, with investment, with excitement, with the potential for transactions and the potential for IPOs. It’s a heyday kind of feel,” he says.
“Going into this downturn, North America was becoming an increasingly attractive place to put money,” Holt says. “Coming out of this downturn, it is triply as interesting. Over the next three, five, seven years, North America’s importance is just going to go up.”
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