Oil M&A activity likely to pick up during 2016

HOUSTON (Bloomberg) -- Oil’s rebound and more certainty around company valuations are keys to driving merger and acquisition (M&A) activity next year, given the pent-up demand for deals, bankers said Tuesday at an energy forum in Houston. “The dam will break at some point,” Stephen Trauber, vice chairman and global head of energy at Citigroup Inc., said at the Mergermarket conference.

The Permian basin in West Texas and southeastern New Mexico is a hot area for M&A interest, while consolidation is expected in the Eagle Ford shale  in South Texas, as producers try to drive efficiencies and lower costs, Trauber said. Offshore, drilling in the deepwater Gulf of Mexico is becoming a “big boys’ game” that is seeing smaller firms leave the subsea fields, he said.

“You have to be big-pocketed and large,” Trauber said. “There’s a lot of sellers and not a lot of buyers. I’m not sure there’s a long list of buyers established to take on the assets that are going to come into the marketplace.”

Oil’s rebound from a six-year low in March has faltered near $60/bbl amid speculation that rising prices will encourage production in U.S. shale formations. OPEC, led by Saudi Arabia, has increased output, exacerbating the oversupply. Goldman Sachs Group Inc. said a continuing surplus would send prices back down to $45/bbl by October.

Strong Interest

Lori Lancaster, managing director of UBS Investment Bank, said at the energy forum, with Trauber, that there is still a lot of M&A interest, even with low oil prices. “We’ve been busier than ever,” Lancaster said.

She sized the players up as firms that have good balance sheets and can weather the oil price downturn, and are trying to decide how opportunistic they can be, as opposed to firms with weak balance sheets that have fewer options. “It’s really hard to get buyers and sellers to agree on price,” she said.

That’s especially true amid interest from international buyers in North American assets. Robert Gray, a partner at Mayer Brown LLP, said a lot of the interest is coming from Asian buyers seeking assets that they can own and not operate. They’re asking questions about what their liabilities will be, if the asset they buy encounters solvency issues, he said. “The Chinese are right now digesting it,” Gray said.