The last two energy crises that have threatened hundreds of energy companies with bankruptcy have rewritten the O&G mergers and acquisitions playbook. Previously, oil and gas companies made many aggressive tactical or cyclical acquisitions following a price crash after many distressed assets became available on the cheap. However, the 2020 oil price crash that sent oil prices into negative territory saw energy companies take a more restrained, strategic and environmentally focused approach to closing M&A deals.
So it’s no surprise that big oil executives have become increasingly hesitant to pull the trigger after the latest wave of mergers and acquisitions turned into a disaster for acquisition companies.
According to data published by the energy analysis firm Enverus, US oil and gas transactions contracted by 65% over one year to 12 billion dollars in the last quarter, a far cry from $34.8 billion in the corresponding period last year, as high volatility in commodity prices left buyers and sellers clashing over asset values.
“The spike in commodity prices that followed Russia’s invasion of Ukraine temporarily stalled mergers and acquisitions as buyers and sellers disagreed on the value of assets,” he said. Andrew Dittmar, director of Enverus Intelligence Research.
Benchmark U.S. crude oil futures briefly spiked above $130 a barrel in early March, shortly after Russia invaded Ukraine, but prices have since cooled on fears of recession, a new wave of Covid-19 and fears of demand destruction. High oil and gas prices last quarter triggered a rebound in M&A activity, particularly from private equity firms.
Enervous reported that transactions by private equity firms saw a significant increase in the first quarter as they bought assets that oil companies considered non-essential to their development plans. These assets tended to be outside of oil-prolific areas like the Permian Basin of West Texas and New Mexico.
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“Private equity still has some dry powder for deals. They use it to target assets labeled as non-core by public companies. Once you get out of the heart of the Permian Basin and a few other key areas, competition for bids lessens, and these positions are often available at buyer-friendly prices. That said, private equity is still a net seller in the space and will likely remain so for the foreseeable future given the number of investments underway and how long that capital will be deployed,” Dittmar noted.
In addition, there are growing concerns that high oil prices have caused significant destruction of demandwhich could hamper a recovery in oil prices.
On Wednesday, we saw crude oil futures give up their modest gains and tumble after the release of data from the Energy Information Administration (EIA). unexpected increases in crude and gasoline inventories in the United States.
On Thursday, September WTI crude fell to $88 a barrel while October Brent crude fell to $94 a barrel.
U.S. crude inventories jumped 4.5 million barrels to 426.6 million barrels, with crude oil stored at the Cushing, Oklahoma hub rising 926,000 barrels from the previous week to 24.5 million barrels, while gasoline inventories added 163,000 barrels to 225.3 million barrels. The four-week average of gasoline consumption in the United States is now more than 1 million bbl/day below pre-COVID seasonal levelsdespite prices at the pump have fallen for 50 consecutive days.
There is another reason, however, why Big Oil has become cold on mergers and acquisitions.
M&A disaster
Cowen analysts have pointed to how the latest wave of mergers and acquisitions has turned into a disaster for the acquiring companies.
In 2020, Shell Plc (NYSE: SHEL) cut its dividend by 66%. It was the first time the company had cut its dividend since World War II, a testament to the severity of the oil massacre, which Shell blamed in his press release. However, another culprit was blamed for the dramatic cut: the company’s 2016 acquisition of BG Group, which cost him 60 billion dollars.
western oil(NYSE:OXY) $55 billion leveraged purchase of Anadarko quickly became the poster child for oil and gas mergers gone wrong. The deal quickly turned into a nightmare, leaving the company in deep distress over its mountain of debt and sarcasm over how it itself could be acquired at a fraction of what it paid for Anadarko.
Cowen also pointed out BP Plc. (NYSE:BP) high debtalthough it might have less to do with his 2018 merger with BHP Billiton for $10.5 billion and more to do with its Deepwater Horizon oil spill that cost it a staggering $65 billion in cleanup and legal fees over the years.
BP’s leverage ratio of 0.96 is more than double the oil and gas industry average of 0.44, and the highest among oil supermajors.
Fortunately, the situation has improved considerably since the oil price crash of 2020, with the vast majority of shale companies now generating millions in profits and free cash flow, even at current oil prices. So we could see more M&A activity down the line.
By Alex Kimani for Oilprice.com
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