Ask the Network: The Outlook for Energy and Utilities M&A

Welcome to “Ask the Network,” where we leverage the expertise of Axial members to answer questions submitted by middle market CEOs.

This week, we posed an industry-specific question to advisors and investors on the network.

“What’s your outlook for energy and utilities M&A for the rest of the year?”

According to a recent report from ValueWalk, global M&A volume in energy, mining, and utilities reached $476.7 billion for Q1 – Q3 2015, up 10.1% vs. Q1 – Q3 2014.

The Wall Street Journal too reports that energy M&A is on the rise despite the oil slump — though “a handful of megamergers has been responsible for most of the surge.” Royal Dutch Shell’s deal to buy BG Group for $70 billion, the year’s biggest deal to date, certainly skews the sector data upward.

Many of the deals in the space are strategic. The article quotes Jay Horine, head of North American energy investment banking at J.P. Morgan Chase & Co:  “When companies are under pressure, the value of the so-called cost and other synergies that come from combining with rivals increases.”

Two Axial members weigh in on the outlook for Q4: 

Derek Weber, Saxon Weber

“After a 10 year high — for deals and deal value — in M&A within the energy sector last year we are seeing continued activity in midstream and OFS across 2015 led by the $35 billion dollar merger of Baker Hughes and Halliburton. In Q4 with oil prices continuing to hold near the bottom — in the mid to low $40 range — we are likely to see deal activity accelerate as companies focus on reassessing profitability of geographic and operator specific oil and gas projects. Longer term outlook investors, both financial and strategic, will be taking advantage of this kind of short term volatility with companies especially E&P’s and upstream top-heavy OFS’s weaken under the stress.”

Nicholas Behl, Industrial Innovation Partners

“As it relates to lower middle market private equity investing in the oil patch, in the next six months we foresee very little investing as the markets are still very uncertain.  Furthermore, in this tough environment PE firms are focused internally on optimizing their energy portfolio companies and dealing with lenders. Once we see some consistent stabilization within the oil patch, then well-tooled energy PE firms will attempt to cherry pick quality assets at reasonable valuations. That said the current PE investing activity outlook for next year is bearish.”