M&A Surge Looms for Oil & Gas Companies

Is there a impending explosion in oil and gas M&A action? There's certainly no lack of interest in acquiring reserves and acreage, if the latest North American Prospect Expo is any indication. The annual event, which brings together buyers and sellers of oil and gas properties, logged record attendance early this month despite the collapse in commodity prices and global credit crunch.

And yet M&A action in the oil and gas industry is pretty much frozen now. After two record years, PricewaterhouseCoopers notes, 2008 M&A activity started out strong in the first half but then followed oil and gas prices off a cliff in the second half.
The interest in dealmaking remains strong, but all the players are flummoxed by the market's uncertainty over valuing both oil and gas assets and company stocks. No one seems to know where the bottom is.

Bewilderment over valuation comes atop constraints on credit capacity, notably access to capital. In a recent survey by BDO Seidman, almost 75 percent of oil and gas CFOs polled said they expect the economic downturn to hinder their ability to borrow money or extend bank debt in 2009.
Yet the ongoing global credit crunch and collapse in equity values may have more companies -- especially overleveraged small independents -- looking for partners or buyers in the months to come. Noteworthy at NAPE was a dramatic increase in foreign companies exhibiting at a North American prospect shopping spree. Several years of high oil prices have left some national oil sector companies such as China's CNPC and China National Offshore Oil flush with cash and hungry for deals abroad.

Indeed, once global credit lines loosen up and oil and gas prices tick upward PwC thinks it is "difficult to see stronger players remaining on the sidelines for the whole of 2009, given the opportunities for acquisitions at low valuations."

The combination of lower commodity prices and limited access to credit will make small independent producers with a high debt-to-capital ratio look especially appetizing. A big pile of debt in tandem with credit constraints could mean no other recourse but to sell.

Some bigger players may already be waiting in the wings, salivating.