Energy, Mining, Utilities M&A Flat as Price Volatility, Uncertainty Loom

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Merger and acquisition activity is down considerably in the energy, mining and utilities (EMU) sector this year, reflecting a rising level of uncertainty as crude oil prices remain volatile and a possible industry-changing U.S. presidential election looms.

Total M&A activity in the EMU sector is at its lowest point since before the great recession hit in 2008, Mergermarket notes in its recent update.

A Precipitous Drop

The drop in M&A has been somewhat sudden. Just two years ago, M&A activity in the global EMU sector reached its highest level (about $640 billion) since the onset of the great recession in 2008, according to Mergermarket. Energy M&A activity then reached $553 billion, followed by mining ($45 billion) and utilities ($42 billion). Total year-to-date M&A activity in the sector at the end of September was just a little under half of the 2014 amount – about $333 billion. The U.S. has led all regions of the world in the value of M&A deals since 2010 (except for a year-end lapse in 2012). Goldman Sachs has led all M&A advisors so far in 2016, brokering 21 deals valued at $107 million.

Among the report’s major findings:

As of the end of the third quarter, the value of the 986 M&A deals in 2016 fell over 21% from the same period in 2015, despite an overall increase in global EMU value in the third quarter. Mergermarket attributes the brunt of that to the plunges in commodity prices.

“Oil and gas companies don’t want to sell at low prices,” Chad Watt, Mergermarket’s energy sector head for North America, told Spend Matters. “Their executives are consistently optimistic about energy prices. Buyers of oil and gas see an opportunity to get in at low prices, and are worried about overpaying. Until fairly recently, the spread between what buyers are bidding and the ask from potential sellers has stifled deal activity.”

Mark Trowbridge, CPSM, CPM, MCIPS, principal, Strategic Procurement Solutions, LLC, calls the phenomenon a “Catch-22.”

“There has definitely been a large slowdown across the entire oil/gas industry sector and certain portions of the mining industry, where specific minerals have declined in market value,” said Trowbridge. “Depressed fuel selling prices have made certain companies’ targets due to overcapacity in the oil/gas sector. But the same factors driving down the market value of acquisition targets has also reduced the ability of acquirers to take advantage of the slowdown.”

One bright side in all of this is the utilities sector, which has eclipsed the mining sector in M&A value over the past two years, according to the Mergermarket report. “Electricity providers have not been equally impacted,” Trowbridge observes. “In fact, many utilities are operating at higher levels of profit due to the decline in petro fuels.”

Mergermarket also found that global EMU assets have depreciated in value, with the average EBITDA multiple for year-to-date acquisitions dropping to 11.4x, down from 16.3x during the first three quarters of 2015.

“The slowdown in the oil/gas and certain segments of the mining sectors have caused a large slowdown in CAPEX investments and new exploration projects by many of the industry players,” Trowbridge noted. “That has also impacted the supporting procurement organization’s support of important projects and refocused their attention upon support of existing infrastructure elements.”

Indeed, as the market intelligence firm IHS noted in its Markit Energy blog recently, North American upstream spending has been sluggish. “Unconventional oil and gas activities have collapsed in the region, with CAPEX expected to drop another 35% in 2016 following a 50% fall in 2015,” the firm noted. While the firm predicted the trend could begin reversing by year’s end, “recovery in spending and activity will be long and drawn out, with regional spending in 2020 to remain 28% below the peak levels observed in 2014.” Globally, upstream spending is expected to be off about 15% this year.

All in all, the poor M&A performance in the EMU sector led it to fall behind the Industrials and Chemicals sector, which notched 2,331 deals the first three quarters totaling $418 billion, according to Mergermarket.

What were the biggest M&A events of 2016? Stay tuned for Part 2, including a 2017 outlook.

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