Tuesday, July 14, 2015

Why Big Oil Deals Are Ready for an Explosion, in Three Charts

As oil began crashing late last year, many prepared for a buying spree. Shale was going on sale. That sale has yet to show up.

Deals have been active in the pipeline and processing sector, including Marathon Petroleum Corp.’s $15.8 billion deal today. But overall, global oil and natural gas deals so far this year are at the lowest level in a decade.

The oil and gas producers that created a U.S. energy revolution haven’t seen their shares fall nearly as much as oil prices, leading to a disconnect between buyers and sellers. That discrepancy has begun to narrow, and deals are sure to follow.

“Some folks with high costs will have to bite the bullet,” said Jim O’Brien, chair of the energy practice at law firm Baker & McKenzie LLP. As oil has slid downward again toward the $50-a-barrel mark, trading around $52 today, here are three charts that help explain why a deal surge is around the corner:

Reserve Values Have Cratered

Buyers of energy companies or assets want to know one thing: how much future oil or gas -- known as reserves -- am I getting for my money? For more than 60 North American producers, the going rate on reserves -- measured as a ratio of enterprise value to future barrels -- is cheaper than it’s been at any time in the last 10 years.

Reality of Low Prices Is Taking Hold

The biggest quarter for oil and gas deals in the past decade was in the final months of 2009, about a year after crude began tanking amid the global financial crisis. In a few months, we’ll be hitting the one-year mark of when falling oil prices turned into a full-scale crash at the end of 2014.

 Company Values Aren’t as Inflated as They Were

The value of oil and gas companies, as estimated by analysts, is finally falling in line with actual share prices. Deals often pick up when this “spread” falls, or when share prices compare more closely with value estimates. The recent decline indicates merger activity may pick up soon.

bloomberg.com

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