PricewaterhouseCoopers sees lull in mergers and acquisitions
By the OGJ Online Staff
HOUSTON, Nov. 5 -- Professional services organization PricewaterhouseCoopers predicted Monday that political and economic uncertainty could jeopardize pending and potential mergers and acquisitions for the global energy industry.
However, the company's Global Energy & Utilities group said the industry remains under pressure to consolidate in order to lower costs and increase access to production.
Rick Roberge, a transaction services partner, said, "The energy industry faces enormous pressure to lower costs, increase efficiencies, and increase shareholder returns. But, at the same time, the industry is inevitably sensitive to larger geopolitical issues. In order for deals to happen, we need some stability. Right now, both stock prices and commodity prices are extremely volatile, which makes pricing hard to do, especially in stock-for-stock deals. Even with recent events, however, the factors that have driven this industry over the past 10 years -- particularly the need to get bigger and become global players -- will continue to be important going forward. But M&A activity will only pick up when stability returns."
Roberge said industry's M&A planners should consider several factors, at least in the short term.
He noted the commodity price outlook remains mixed. "The Organization of Petroleum Exporting Countries is committed to a $22-25/bbl price at current production levels. However, should the conflict in Afghanistan spread to other areas of the Middle East and threaten supply, all bets are off. With natural gas, given very high storage levels heading into winter, it appears any forecast north of $3/Mcf would require a very cold winter.
"The strong are getting stronger and the weak are getting weaker. Top tier companies with cash in place have room to do deals even in this difficult environment, and they will continue to look at the top second-tier companies that lack critical mass to do business globally at all levels. Look for continued consolidation of second-tier refiners in the US as refining increasingly becomes a game for the big players. Also, the bottom tier of the oil and gas industry is being hurt badly by volatility in commodity prices, limiting access to capital and making them possible acquisition targets for top-tier companies."
Secondly, Roberge said the easy deals have been done. "With most of the major energy companies in Canada and the UK already acquired, the most promising opportunities for US companies in the future may well be state-owned companies in Africa, South America, Russia, and the Middle East. But those transactions have longer lead times and are inherently more difficult to complete, a less than perfect fit in a short-term shareholder world.
"Looking at it in one way, the global energy industry is already far more efficient, in large part because of the effects of consolidation at all levels. However, in the current environment, it is also clear that the economics of the marketplace may not be as powerful, in the short term, as competing political forces. Any additional terrorist acts in the near future will add to the uncertainty and ultimately, increase volatility -- which stifles M&A activity."