Low oil price constricts M&A activity

With the price of oil continuously falling in the past year, M&A activity in the oil and gas sectors has dropped significantly in Q4, a report by PricewaterhouseCoopers (PwC) finds.

Deal volume declined 40 percent from 70 deals worth $50 million or more in the fourth quarter of 2014 to 42 deals during the last three months of 2015. The drop in deal value year-on-year was even greater, falling 69 percent from $103.4 billion to $31.6 billion.

“Accelerating declines in oil and gas prices, coupled with the closing of the capital markets for oil and gas companies during the second half of 2015, drove management teams to focus on cash preservation,” PwC’s US oil & gas sector deals leader Doug Meier said in the report. “As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models.”

As a result, “the priority for many oil and gas companies is to work with lenders to revise the repayment terms of their debt agreements,” said Joe Dunlavey, the firm’s US energy sector capital markets leader.

Despite the challenging M&A environment, PwC believes the sector still offers opportunities particularly for companies that have the available capital.

According to PwC’s US energy and infrastructure deals partner Rob McCeney, “financial sponsors are well-positioned to find distressed opportunities and will use positions of weakness to their advantage.”

In the fourth quarter of 2015, financial investors were active in 14 transactions, worth $4.3 billion or 33 percent of the total deals announced in the quarter. Equity commitments from private investors accounted for six of these 14 financial deals worth $2.2 billion.

The midstream sector was also a casualty with 11 deals contributing $9.4 billion in value in the fourth quarter, a 42 percent and 79 percent drop in terms of value and volume, respectively, year-on-year.

As for mega-deals (deals worth at least $1 billion) the drop was more significant in value – $22.8 billion last quarter compared to $87.7 billion in the fourth quarter of 2014 – than in volume, eight deals compared to 12 deals in the same time periods.

“For M&A activity to resume at a reasonable pace, it will take buyers who are patient and have long-term perspective on the potential value of the assets while it will take some motivation from sellers who have few other liquidity options and are able to get reasonable value under the circumstances,” said Seenu Akunuri, PwC’s US oil & gas valuation practice leader.