Why Big Oil Deals are Ready for an Explosion

Copyright CGP Grey/Flickr
Copyright CGP Grey/Flickr

The long wait for oil and gas deals appears to be nearing an end as two transactions worth more than $18 billion were announced in the past 24 hours.

Shale producer WPX Energy Inc. today said it plans to buy a closely held exploration company for $2.35 billion, and refiner Marathon Petroleum Corp. Monday said it will buy a major natural gas processor for $15.8 billion.

A long-awaited “sale on shale” had yet to come to pass in the first half of the year as the oil and gas producers that created a U.S. energy revolution didn’t see their shares fall nearly as much as oil prices. Deals fell to the lowest level in a decade, creating a disconnect between buyers and sellers that has narrowed. The deals are beginning to follow.

“Some folks with high costs will have to bite the bullet,” said Jim O’Brien, chair of the energy practice at law firm Baker & McKenzie LLP.

As oil has slid downward again toward the $50-a-barrel mark, trading around $52 today, here are three charts that help explain why a deal surge is around the corner:

Reserve Values Have Cratered

Buyers of energy companies or assets want to know one thing: how much future oil or gas — known as reserves — am I getting for my money?

For more than 60 North American producers, the going rate on reserves — measured as a ratio of enterprise value to future barrels — is cheaper than it’s been at any time in the last 10 years.

Oil chart 1

© Bloomberg Oil chart 1

Reality of Low Prices Is Taking Hold

The biggest quarter for oil and gas deals in the past decade was in the final months of 2009, about a year after crude began tanking amid the global financial crisis.

In a few months, we’ll be hitting the one-year mark of when falling oil prices turned into a full-scale crash at the end of 2014.

Oil chart 2

© Bloomberg Oil chart 2

Company Values Aren’t as Inflated as They Were

The value of oil and gas companies, as estimated by analysts, is finally falling in line with actual share prices.

Deals often pick up when this “spread” falls, or when share prices compare more closely with value estimates. The recent decline indicates merger activity may pick up soon.

Oil chart 3

© Bloomberg Oil chart 3

Written by Bradley Olson of Bloomberg

(Source: Bloomberg)

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