As a new normal appears to be setting in at $40 oil, companies large and small are counting their quarters and weighing their options.
Lawyers, analysts and investors are lining up their picks for which companies have the staying power – perhaps better known in these parts as liquidity – to survive what some say remains an oncoming storm.
Bob Gray, a corporate transactions lawyer at Mayer Brown LLP in Houston said he believes this time of transition could be a fair-weather friend for the emergence of a new mergers and acquisitions (M&A) cycle.
Corporate Transactions Law Partner, Mayer Brown LLP
“I think it is for two reasons: People are now accepting that it’s going to be – hopefully – [at least] $40 oil for a while. It’s not going to bounce back to $85 or $90 anytime soon, so those who were contemplating a sale transaction, I believe they think they can value their business and won’t look foolish as though they sold out at the nadir point. That’s one group,” Gray told Rigzone. “Then, there are those that at $40 oil, were hoping it was going to come back. It hasn’t, and the new reality is their go-forward plan doesn’t work with their debt structure. They have to look at a restructure and or do something to correct their capital structure.”
Charles Kelley, the lead partner in the litigation and dispute resolution practice at Mayer Brown LLP in Houston, said that in talking about mergers and acquisitions, the term has evolved.
“My gut reaction is, it depends on what you define as M&A. I’m watching a lot of companies that are in high distress, and the value of the company is probably not enough to pay off all the levels in their capital structure, and so they’re probably going to have some unsecured creditors who are not going to be paid, some second liens that aren’t going to get paid, and if you sell the assets, you may pay off the lenders. But these companies are already in default,” he told Rigzone.
Those are sales essentially made out of desperation.
Lead Partner in the Litigation & Dispute Resolution Practice, Mayer Brown LLP
“I don’t see those as traditional M&A deals that are voluntary, where people go to the markets and make an accretive business merger. I see some of those as distress driven where they’re trying to satisfy creditors and obligations in the order of hierarchy and with the levers those creditors bring to the table,” he said.
Rather, when oil dropped below $40 per barrel in December, the industry came to a standstill.
“Many feel that these companies [they] are investing in [have]longer economics because your lifting cost on it might be $44 to $44. Some are in the $50s and some are in the $60s, so you can’t produce if you’re losing money with every gallon you produce. I think that whole dynamic has people spooked,” he said. “I don’t see the traditional M&A market fully rebounding yet. Right when everyone was comfortable that we were at the bottom of the market, commodity prices fell further.”
In a Wells Fargo Securities’ report Dec. 10, analysts noted there was little chatter about M&A at the group’s energy symposium. Analysts said a handful of management types noted that “value acceleration” isn’t apparent and in some parts of the country, infrastructure constraints remain present.
“On the positive side, several management teams also commented that while still too wide, the bid-ask spread has begun to narrow,” they wrote.
The $500 Billion Dollar Question
Corporate filings show that a handful of publically traded companies have around a half-trillion dollars in their coffers, but so far, there’s been no flurry of major M&A activity. But that might hold for long.
Gray said he believes some buys are likely in the works, including one he’s currently working to transact. These major companies are reducing their capital expenditures (CAPEX) on current projects and zeroing in on plays where they want to establish a footprint. One recent deal Gray negotiated in which a supermajor wanted to buy assets in the San Juan basin took so long that oil prices bounced back and forth. The buyer, however, was un-phased.
“It did not affect the value that was placed on it by the supermajor,” he said. “They just wanted the assets.”
Buy Out, Sell Out Or Just Go Away: M&A Expected To Surge
(Comments from Attorneys Charles Kelley and Bob Gray from Mayer Brown LLP
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