Source: Anadarko Petroleum Corporation
For most of the past year energy analysts have been waiting for a wave of mergers to hit the oil industry. To date, there have just been a couple, headlined by Shell'sproposed $70 billion deal to buy rival BG Group and Noble Energy'srecently closed $3.9 billion deal for shale driller Rosetta Resources. Most analysts expected there to be more deals, which is why the lack of deals was a topic of conversation on several second-quarter conference calls with oil executives. Here's why oil executives say the industry isn't seeing many mergers.
Asset values are just too highOne of the most interesting revelations on the second-quarter conference call of major energy companies is just how frustrated they were with the M&A market this year. This was the lament of growth-by-acquisition MLP LINN Energy's (NASDAQ: LINE) CEO Mark Ellis as he said that,
One reason the market has been slow is because asset valuations are sky-high despite the downturn in the oil price. Anadarko Petroleum CEO Al Walker pointed out how tough it has been for his company to pick up acreage in the Delaware Basin noting that,
As Walker points out Anadarko Petroleum has been absolutely stunned by the fact that it has been outbid for assets that were a strong strategic fit by, in some cases, double its most aggressive bid. This is what's really holding back the floodgates of M&A activity within the industry, asset values are just too high for some companies as too much money is chasing too few assets.
The underlying cause was best explained by LINN Energy's CFO Kolja Rockovas he pointed out that,
Rockov noted that private equity funds have a massive $100 billion war chest that they're specifically focusing on investing in assets that have drilling upside, like what Anadarko has been seeking in the Delaware Basin. Because asset values are high many oil companies don't feel the need to sell out because they believe that they can just sell some assets if they need liquidity.
What the future may holdWhat was really interesting is the fact that several oil company executives noted that there's a really big disconnect between asset values and corporate valuations, which was something Robert Gwin, the CFO of Anadarko Petroleum, discussed on his company's call saying,
As Gwin points out, corporate mergers look really compelling just on a valuation standpoint. However, the problem is finding a good fit, which is compounded by finding a willing seller. That said, he does think that a wave of corporate mergers could still be on the horizon. He said that, "it's going to be an interesting second half of the year here driven by the commodity-price environment and if the market stays relatively weak then obviously the opportunity to do something might go up."
These were comments that were echoed by ConocoPhillips CEO Ryan Lance. He said that,
That being said, the ConocoPhillips CEO isn't quite as optimistic about a big wave of mergers before the end of the year saying that, "I still don't personally believe the floodgates are opening on that, but I think it's something that industry will be watching pretty closely if these kinds of prices persist for a longer period of time."
Investor takeawayThe oil industry is really being propped up by a massive infusion of cash by private equity right now, which is holding back the floodgates of merger activity. That being said, as oil stays lower for longer it could open up the door for more corporate mergers just because of the huge value disconnect between asset values and corporate values. Needless to say, the second half of the year could be a busy one for the sector.
The article Where Are All The Oil Mergers? originally appeared on Fool.com.
Matt DiLallo owns shares of ConocoPhillips and Linn Energy, LLC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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