Energy Business

Nomura Sees More M&A in the Oil Patch

Source: Thinkstock
Investors and analysts have been talking about consolidation in the oil patch ever since the beginning of this year. But not many companies have stepped up to the plate, either as buyers or sellers. That could be about to change, according to analysts at Nomura.

Lloyd Byrne and Brian Downey have correctly, in our view, analyzed the past 12 months:

Energy M&A has seen a slow start in the current downcycle, as potential buyers were reluctant to pay more than the forward curve while sellers didn’t want to divest prematurely.

But, they note, these attitudes are changing:

With commodity prices remaining depressed, and outlooks becoming more pessimistic, the past few weeks have seen multiple transactions where prices paid appear fair to both parties … [and in which] valuations largely made sense in light of the prevailing forward curve.

ALSO READ: Stifel Says Not to Wait for Oil to Bottom: 4 Stocks to Buy Right Now

They point to two specific recent transactions: Encana’s sale of its Haynesville shale assets to Geosouthern Energy for $850 million and Total’s sale of a 10% working interest in its Fort Hills oil sands project to Suncor for $310 million. The analysts expect to see more of this kind of action:

We expect to see an increasing number of similar deals, as buyers look to opportunistically add to core competency positions (as this is the point where returns are made in cyclical industries) and private equity looks to deploy capital in the downcycle. Similarly, sellers use non-core proceeds to fill 2016E funding gaps and/or reinvest in higher-return core assets, as the compounding of “option value moves to option cost” is significant. To-date, the Majors have remained largely underexposed to shale.

Sponsored: Find a Qualified Financial Advisor

Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.