Pent-Up M&A Could Release Flood of 2016 Deals

According to information from Ryder Scott Co. LP, the majority of deals since late 2014 have been composed of all stock or a mixture of stock and cash.

Bankers Kicking the Can

Twice a year, lenders have the option to re-determine the borrowing base of the borrower. During the recent spring redetermination, a number of companies knew they would face a difficult period given the tightening in the market, Stephen Trauber, vice chairman and global chief of energy for Citi, told a Houston audience at the Mergermarket Energy Forum recently.

Recent Year M&A Deals in U.S., Source: PwC's analysis of transaction data from Global Data

Most of those companies impacted were non-investment grade entities that had already realized they needed to shore up their balance sheets, Trauber said.

“The equity market was there, at cost, and companies came at fairly steep discounts. We’ll still see some of that coming into the fall redetermination,” he said. “I think the banks were fairly lenient and the borrowing bases that were awarded to some of these companies in the spring redetermination effectively kicked the can down the road.”

Trauber explained that banks expected some concessions from the companies, whether it was through asset sales, a shrunken borrowing base, and/or equity offerings. If commodity prices stay where they are today, or even weaken from where they are today, more companies will need to engage to remain attractive to lenders.

Robert Gray Jr., a partner in the Houston office of Mayer Brown LLP, said he expects the banks to “kick the can down the road.”

“Number one, they don’t want to operate these assets,” he told the Mergermarket audience. “That’s the last thing they want to do, and number two, they haven’t been through an upstream collapse. I think the banks are going to continue to extend [leniency].”