Finding the Right Opportunities in Energy M&A
- Michael Collier (PricewaterhouseCoopers)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- August 2010
- Document Type
- Journal Paper
- 16 - 17
- 2010. Copyright is retained by the author. This document is distributed by SPE with the permission of the author. Contact the author for permission to use material from this document.
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One sure sign that the economy is in recovery mode is the increase in merger and acquisition (M&A) activity, including the USD 60 billion of deals in the energy sector in the first quarter of 2010. The depth and breadth of the M&A rebound in energy has been fueled by optimism that we are emerging from a global financial “funk” and we are at the beginning of a long period of sustained economic growth.
With optimism returning, there are two major reasons we may see an abundance of deals in the energy arena: pent-up demand for deals in the service and equipment space, and the new shale-gas paradigm.
Reordering of Portfolios
In the equipment and service arena, there has been a significant absence of deals over the past 2 years due to uncertain economic conditions. Companies are now in a position to acquire technology and know-how and reorder their portfolios to take advantage of their differential advantage (which is constantly in a state of flux). For example, a company with a strong presence in a particular area that is attracting a lot of investment (i.e., drilling) may seek to expand its product offering in that area to increase the share of the overall service content of the wells. In other instances, particularly in dealing with national oil companies (NOCs), service companies might seek to do a better job bundling services that are relevant to their NOC customers’ changing needs.
Several strategic moves were propelled by what appeared to be (at least at the moment) a recovering stock market, allowing senior executives to see stock-for-stock deals as fair. Thus we have seen several major stock-for-stock transactions in the service space, and (assuming the markets quickly find their way back to a stable footing) there may still be more to come.
Cash-for-stock deals, however, are less prevalent today because they depend on absolute (vs. relative) valuation fairness. Said another way, it is one thing to use my undervalued stock to acquire your undervalued stock. To your shareholders, and mine, it is a fair trade. But for me to use my cash to buy your stock, we both need to know that the valuation is not just fair on a relative scale, it has to be right. Until recently, it was difficult for both buyer and seller to see any particular acquisition price as the right price because earnings of target companies were declining. As the overall economy improves and sellers report steadily improving quarterly earnings, price expectations between buyer and seller are coming into line. When they are finally aligned, which often happens four to five quarters after the economy begins to recover, then we will see not only corporate cash-for-stock deals become common, but we will also see private equity firms come off the sidelines with a major wave of transactions.
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