It seems natural that the current weak commodity price environment will lead to more M&A, given how many cheap opportunities are out there for companies with strong balance sheets.
But an examination by RBC Capital Markets of the past 20 years, which encompassed four major downtrends, demonstrates that has not historically been the case in the U.S. energy sector.
RBC analysts found that corporate takeovers are actually more frequent when commodity markets are healthier, or prices are trending higher.
Leo Mariani noted that 65 per cent of U.S. exploration and production company takeouts in the past 20 years were in a decent or rising commodity environment.
“There may be a lot of buyers for oil and gas companies out there right now at a low point in the cycle, but we don’t think that there are a lot of sellers,” the analyst said in a report. “Corporate M&A is more driven by motivated sellers rather than motivated buyers.”
He also found that transactions during past downturns had significantly lower takeover premiums, coming in at 17 per cent versus 31 per cent in better commodity environments.
Mariani explained that since much of the takeover activity in the past five years has centred on the Permian, Bakken and Eagle Ford regions — the best oil plays around — companies in these areas had access to capital markets to solidify their balance sheets in 2015. This has also allowed them to look for cheap assets.
That’s why the analyst doesn’t think these companies will put themselves up for sale in a weak pricing environment.
“We believe takeovers will happen once commodities start to recover,” he said, adding that larger companies will look to consolidate the Permian Basin and Appalachia.
Mariani’s top takeover candidates among U.S. E&Ps are Concho Resources Inc., Eclipse Resources Corp., Energen Corp., Gulfport Energy Corp., Matador Resources Co., Parsley Energy Inc.., Pioneer Natural Resources Co., Range Resources Corp. and RSP Permian Inc.