M & A Activity likely to pick up in Q2

[dan_s]

During the last oil price cycle (2008 / 2009), when the price of oil started to drift higher (around Q2 2009) there was a lot of M&A activity. I am expecting it to happen again. I think four or more of our Sweet 16 may be acquire; probably very close to my Fair Value Estimates. - Dan

I am not the only one who sees it coming...

North America Integrated and E&P: Down-Cycle M&A
Evan Calio – Morgan Stanley
April 10, 2015

We expect upstream consolidation in this energy down-cycle. XOM and CVX could be acquirers given relative performance, access to inexpensive debt and strategic need in larger production portfolios. Large-Cap E&Ps have desire and capacity to add unconventional acreage, yet “bid-ask” spreads remain wide.

Why now? We see several reasons for increased M&A in 2015:
(1) oil is 50% off 12 month highs and expected to materially recover in 6-18 months, and longer-term views of normal range $70-$85/bbl Brent;
(2) in the last 4 years, US unconventionals have emerged, been defined, continue to improve and largely exist well within current cost curve;
(3) many US E&Ps are in the midst of restructuring with large cash positions and stated ambition to increase unconventional resource exposure;
(4) financing remains at historically low levels; and
(5) energy is an extractive business where decline curves make it naturally an M&A business.

We believe M&A activity will provide another supporting element to upstream equity values.

Majors: likely down-cycle buyers. One of the most common investor questions through the cycle is, “who will the Majors buy?” The potential list is much longer and the rumors are much more extensive than actual deals thus far, yet both XOM and CVX referenced M&A potential in recent analyst days. We believe the two Super Majors are built for down-cycle acquisitions and are most likely to be opportunistic. Integrated cash flows (refining and chemicals), balance sheet strength and yield-supported valuations give XOM and CVX significant advantage as buyers in a down-cycle. With XOM at a premium to a number of Large-Cap E&Ps (on EV/EBITDAX), an equity transaction remains possible. Capacity is further bolstered by ability to borrow debt at record low levels. XOM, for instance, recently raised $7Bn of variable maturity notes at 1.305%-3.567%, securing a cost of capital advantage to global E&Ps.

[bearcatbob]

Dan,

In your recent email with updated profiles of AREX and LPI you indicated both were prime takeover candidates due to their concentrated land holdings.

What size of company would be the acquirer? Much of the takeover talk is focused on the big guys taking out companies like Anadarko or Apache. While I could see these companies looking at bigger plays like OAS, WLL and say EOG - I see companies like LPI and AREX as too small for their taste.

Who do you see to be the buyers of the smaller companies?

Bob

[dan_s]

Your question requires a crystal ball to answer! Companies the size of Hess or Marathon can buy any of our portfolio companies. I managed a team at Hess for three years that spent most of its time looking for takeover targets. Many of the companies I follow were built for a takeover. The best targets are those with a lot of de-risked acreage in large blocks.

A well funded company like FANG could easily take over CPE or AREX. They could use their stock as currency.

Devon is also actively looking.