Global M&A in 2016 will likely surpass the hyperactive deal making that totaled $4.7 trillion in 2015, but whether the energy industry will see a surge in activity is yet unclear, according to two recent reports.
A Mergermarket report showed a 27.2% reduction in total number of deals in the energy sector in 2015 compared to 2014. The value of those deals was down by 6.8% to $547.7 billion. Low commodity prices are leading to increased scrutiny of MLPs, the report said, and will contribute to a shakeout.
“While midstream MLPs are expected to weather the storm, upstream MLPs will pursue a variety of survival strategies in a prolonged low oil and gas price environment, but not all will make it,” said Mergermarket.
KPMG LLP’s survey of global executives found a bullish outlook generally for M&A. Among energy leaders, 47% identified consolidation of core businesses and competition as the leading driver for deals this year. The second key trend, picked by 43% of respondents, is the persistence of lower oil prices.
The top two challenges that energy executives perceive are valuation disparity between buyers and sellers (47%), and the general economic environment (42%). However, executives in all industries pointed to large cash reserves (51%) as the leading driver of M&A followed by the availability of credit on favorable terms (36%).
“Strong balance sheets tend to determine the method of financing deals,” the KPMG report said.
Michael Underhill, founder and chief investment officer of Wisconsin-based Capital Innovations and author of “Handbook of Infrastructure Investing,” echoed that sentiment.
“The market’s focus has shifted from companies’ slowing growth prospects, which have characterized much of 2015, to the need for efficient capital allocation given pockets of balance sheet stress in 2016,” he told Hart Energy recently. “Companies are not being paid to grow dividends in this environment. Instead, we believe those with strong balance sheets and the best access to capital should continue to outperform their peers.”
KPMG’s survey showed an expectation that megadeals—those valued at $50 billion or more—are on the rise. Among factors that could inhibit M&A, executives included concerns such as:
- Slowing economic growth (42%);
- Rising interest rates (27%); and
- Lack of suitable targets (26%).
Joseph Markman can be reached at jmarkman@hartenergy.com.
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