Tuesday, May 12, 2009

More Deals Likely in Oil Sector...But Not Quite Yet

Interesting take today via Bloomberg. Naturally with commodity prices depressed (although not as much as they were a month ago), we'd expect consolidation among the industry. Cash-rich companies are naturally going to buy up smaller names in order to grow. This may still be coming as these companies have recently been worrying about price hedges, but that will change:

Quantum Energy Partners, the Houston private-equity firm that put together a $3.5 billion bankroll to go bargain-hunting for acquisitions after oil and natural-gas prices plunged, is waiting for a better time to pounce. Buyers will accelerate acquisitions late this year and in early 2010 as the hedging contracts that shielded potential takeover targets from tumbling prices expire, said Wil VanLoh, Quantum’s chief executive officer.

“By the first quarter of next year, we’ll be pretty darn active,” VanLoh said in an interview at his downtown office. “Many companies are very well hedged for 2009, so the squeeze hasn’t happened yet. The point of capitulation probably will arrive in the fourth quarter or the first quarter of 2010.”

The record drop in crude prices from 2008’s all-time high hasn’t triggered a surge in takeovers because would-be sellers are demanding mid-2008 valuations, said Michael Bodino, director of research at Sanders Morris Harris Inc. in Dallas. That will change, Bodino and VanLoh said, as hedging contracts drop off, forcing the weakest producers to sell or face bankruptcy.


  • The number of oil and gas deals last month fell 35 percent from a year earlier, and the value of transactions dropped 60 percent to $5 billion, according to data compiled by Bloomberg. UTS Energy Corp. of Calgary repulsed a third and final takeover bid of C$830 million ($680 million) by Total SA last month, saying the company is worth more.

Take a look at Canadian oil producers. Many are extracting oil from the oil sands, which is lengthy and expensive process. If oil prices stay depressed, some companies won't be able to continue to produce. This is the same thesis for natural gas, and many other commodities. There will be consolidation and lowering of output in the short term. In the intermediate term, this will help put upside pressure on prices.

  • In the Canadian province of Alberta, home to an oil industry that five years ago surpassed Saudi Arabia as the biggest crude exporter to the U.S., cratering stock values and lower energy prices have prompted the C$70 billion ($61 billion) Alberta Investment Management Corp. to step up the search for investment opportunities.
  • “With commodity prices where they are now, Alberta is looking like it’s going to present a lot of opportunities for us,” Chief Operating Officer Jagdeep Singh Bachher said in a telephone interview.
  • Edmonton-based AIMCO, as the Crown corporation is known, agreed last month to acquire a 20 percent stake in Calgary-based Precision Drilling Trust, Canada’s largest oil driller. AIMCO’s next move will be to sift through the market wreckage and find companies with assets and management teams most likely to excel even if energy prices remain depressed, said Brian Gibson, senior vice president for public equities at AIMCO.
We already saw the Suncor-Petro Canada merger in this sector. I'd expect others, especially if commodity prices stay at these levels or lower.

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