It is not uncommon to see acquisition opportunities arise at the bottom of a commodity price cycle, as low prices put pressure on companies to sell assets at revised down prices, in order to raise cash to fund projects or offset revenues lost to low commodity prices. Low oil and gas prices therefore promise to make 2015 a year in which well-capitalized players find opportunities to invest or grow in the oil and gas industry.
The stunning decline in oil prices since June of 2014 has been precipitated by a number of factors. On the supply side, unprecedented levels of US oil production and OPEC’s refusal to curb its member states’ production levels have resulted in a glut of supply; and on the demand side, weak global economic activity, increased climate change and energy efficiency initiatives, and movement to alternative energy sources are all factors playing into consumption levels failing to keep pace with the high levels of oil production. And although overshadowed by the oil price media frenzy, natural gas prices have been subject to a similarly striking downward trend in recent months, hitting a 28-month low in January of 2015, after a mild December throughout much of North America left natural gas reserves at unexpectedly high levels and investors pessimistic about the ability to achieve significant profit gains in the last few months of winter.
While the causes of the downturn in commodity prices seem capable of being identified with some level of precision, it is far from clear that an end to these price falls can be pinpointed with anything close to a similar level of certainty. Indeed, as one witnesses the successive upending of market analysts’ projections about the ‘final’ price bottom having been reached, it seems clear that the only thing that one can safely conclude is that the ultimate price floor is anyone’s best guess.
In this context, the critical question for companies contemplating whether to buy or sell in this industry may become less a matter of “if” to act, and more a question of “when”. Well-capitalized companies and private equity firms will have good reason to aggressively pursue opportunities to consolidate with, or acquire the assets of, smaller firms with weak balance sheets. Conversely, many of these undercapitalized firms will be reluctant to sell in this market, and are likely to hold out as long as possible in hopes of a price recovery. But as daily industry news reports are making clear, it is likely that a good number of firms will ultimately have no choice but to merge or sell at discounted or distressed prices, particularly if prices continue their decline and destroy firms’ ability to borrow funds or raise capital. Companies that do have to do a ‘deal of necessity’ in these circumstances may push for a share transaction structure in order to preserve their ability to participate in any upside when markets improve.
In sum, today’s bearish market conditions are tough but not without their upside for the right industry players. Companies and private equity firms with sizeable cash reserves can rightly be expected to pursue opportunities to acquire strategic assets, achieve economies of scale or realize operational efficiencies in the context of a buyers’ market.