The surge in oil and natural gas prices hasn't given the stocks of all energy companies a boost, according to PricewaterhouseCoopers LLP's recent mergers & acquisitions (M&A) forecast for 2001. The lack of translation between high commodity prices and stock prices for energy companies will most likely continue to fuel M&A activity within the energy industry for the coming year.
Cash flow and earnings are up significantly for many energy companies, but New York-based PricewaterhouseCoopers noted Monday that "companies aren't being rewarded in the stock market for many reasons."
Competition for capital funding has tightened due to both the volatile nature of oil and gas prices that has deterred investors and the substantial amount of spending directed toward technology companies, said Rick Roberge, head of transaction services for PricewaterhouseCoopers' global energy and mining group. "The fact that oil prices soared so quickly just reinforced the energy sector's volatility to investors."
"There were not a lot of underwritings this year [for oil and gas]," said Roberge, adding that he expected to see more underwritings given the increases in cash flows and earnings for many energy companies.
The energy companies that are receiving funds tend to be larger companies. The fact that larger companies are receiving more funding, while smaller companies have largely been overlooked, will help fuel to M&A trend as companies with large reserves of cash look to acquire other companies whose stock prices are languishing. "Ultimately, capital constraints will force companies together to fuel growth," said Roberge.
Within the next 12-18 months, PricewaterhouseCoopers expects to see another megamerger similar in size to Chevron Corp. and Texaco Inc.'s recently announced plans to merge operations (OGJ Online, Oct. 23, 2000).
But companies that have accumulated large reserves of cash can also create concern for investors as to whether these companies will spend the wealth wisely. "Investors will be watching to see which companies are sticking to the things that have helped them grow and are spending their money prudently," Roberge said.
Price volatility will hurt smaller independent companies with stock capitalizations under $1 billion. PricewaterhouseCoopers said it expects larger independents to try acquiring smaller independents as many of the major oil companies did during 1999, when oil prices were low.
"If large independents are too small, they'll have a difficult time competing against the majors for high-risk/high-return international projects," said Roberge. Attracting institutional investors, critical for increased liquidity, "becomes difficult as those investors focus on returns on capital that can only be consistently delivered in this industry by the very large companies."
Smaller independents that grow too large also face this problem as investors searching for solid growth investments begin to shun the smaller independents' stocks.
Roberge said that the Canadian energy market is even more volatile than that of the US. He also noted that a number of companies had seen their stock prices fall after their plans to increase their oil and natural gas production faltered. A number of smaller companies bit off "more than they could chew" in trying to raise their production and reserves.
The weakness of the Canadian versus the US dollar also has made small to mid-cap size companies in Canada more vulnerable to takeover by US companies. "American independents will likely seek out companies that can add natural gas reserves or production opportunities to their portfolio," Roberge said, adding that the Canadian companies that will succeed "are those whose management teams know when to sell if production or projects grow beyond their skill sets."