HOUSTON, Feb 26 (Reuters) - Distressed asset sales are likely to dominate dealmaking in the U.S. energy industry this year as volatile oil prices put executives off major acquisitions.
Normally strong companies buy weaker rivals when crude prices tank. Even though a 20-month slump has pushed oil to decade lows, however, executives have yet to pull the trigger on a new era of consolidation as they fear prices have yet to hit bottom.
Instead, most of the action has focused on small, highly leveraged exploration and production companies' selling off assets to raise cash.
Vanguard Natural Resources is a case in point.
Last year, the Houston-based oil and gas producer spent more than $1 billion in stock and debt to buy two hometown rivals and increase its drilling opportunities.
Now it is selling off some of its recently acquired oil fields in Texas and Oklahoma, according to people familiar with the situation.
They requested anonymity because the matter is private, and Vanguard did not respond to requests for comment.
As the commodity slump drags its share price lower, the company's long-term debt of $1.8 billion is now more than six times Vanguard's current market value. Some of the senior debt has been trading at around 12 cents on the dollar.
Private equity-backed companies now make up the majority of buyers in the energy sector, said Jason Craig, a director of global resource-focused buyout firm Denham Capital Management LP.
But uncertainty about oil prices is holding back strategic tie-ups between energy companies and big deals, according to more than a dozen investment bankers and executives whom Reuters interviewed in Houston on the sidelines of this week's IHS CERAWeek conference, the sector's annual jamboree.
"There's just a disconnect between the buyer and the seller on price," said Pioneer Natural Resources Co Chief Executive Officer Scott Sheffield. "And that's the primary reason you don't have a lot of deals being traded."
Oil markets have seesawed wildly in recent weeks. While the International Energy Agency predicted that falling U.S. production would lead to a slow recovery starting next year, it also referenced the market's "free-for-all" nature.
"Even lower for even longer" was the catchphrase at CERAWeek, with some executives warning that the industry was only halfway through its downturn.
Taking A Gamble
When delegates last gathered for CERAWeek in April 2015, crude was trading around $55 a barrel and Royal Dutch Shell had just reached an agreement to buy gas producer BG. A brief rally in oil prices proved fleeting, though, and an expected wave of follow-on deals never materialized.
Shell CEO Ben van Beurden won shareholder approval for the $53 billion acquisition last month, but 17 percent of investors voted against it, reflecting frustration that oil and gas prices have fallen since the deal was signed.
Other executives have not been so brave. Global oil and gas M&A activity dropped 11 percent during 2015, which was a record year for deals overall, according to Thomson Reuters data.
Potential sellers with room for maneuver are reluctant to make deals now because of the low oil prices, but others saw the drop to below $30 a barrel in January as a wake-up call.
The average U.S. shale producer only makes a profit when oil is at or above $59 a barrel. With capital markets cut off for all but those with the most pristine balance sheets, many of these companies are running out of options.
Roughly 175 oil producers, or a third of the sector, face a high risk of slipping into bankruptcy this year, according to a study by Deloitte.
That will create an opportunity for would-be buyers waiting until the companies hit the wall before picking up assets.
Weak oil prices reshaped the global energy industry in the late 1990s with a megamerger wave in which Exxon bought Mobil for $85.6 billion and BP acquired Amoco for $48 billion.
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