Energy M&A Outlook: What the Halliburton-Baker Hughes Fail Tells Us About 2017

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In Part 1 of our latest energy, mining and utilities outlook, we focused on the precipitous drop in this sector’s M&A activity, outlining exactly how many billions of dollars are at stake. So where to look first?

2016’s Biggest M&A Events

Energy has traditionally represented the lion's share of global M&A deals, 82% so far in 2016. Mergermarket attributes the main driver to pipeline industry consolidation, following Canada-based Enbridge’s $41 billion acquisition of U.S.-based Spectra Energy, and Next Era Energy’s $18 billion buy of U.S.-based Energy Future Holdings, an energy services group.

But the most noteworthy non-event that gave procurement professionals pause, according to Mark Trowbridge, CPSM, CPM, MCIPS, principal, Strategic Procurement Solutions, LLC, was the doomed $28 billion Halliburton acquisition of Baker Hughes, “the two most dominant players in 20 segments of the oilfield services marketplace,” he told Spend Matters.

“While this merger was apparently very attractive to the leaders of these two companies, it could have resulted in a significant loss of competition for procurement groups in their customer organizations around the world,” Trowbridge said. “The merger would also have likely resulted in the layoff or spinoff of many excess capacity elements of these two leading firms.”

Looking Forward to 2017

Chad Watt, Mergermarket’s energy sector head for North America, believes M&A activity could pick up should larger oil and gas players get hungry for a deal.

“Equity investors see opportunity and upside in oil and gas and have been hungry for secondary equity offerings from large independent oil companies,” Watt said. “That has fueled a strong acquisition spree in the Permian Basin and set some valuation records in that region.”

Watt noted that about a half-dozen upstream oil and gas companies are preparing for IPOs. “Extraction oil and gas priced [recently] and was well-received. And while prices are comparatively low, upstream producers have worked hard to become more efficient and precise in their drilling operations. Efficiency has made a wider range of basins and fields economic even at $50 a barrel.”

Meanwhile, North America, notably the U.S., could continue becoming an even more dominant player on the global EMU stage, according to Watt, who notes that the U.S. already dominates energy and natural resources in the M&A context.

“EMU deal value climbed to $159.9 billion in the third quarter, the largest amount this year, and the best tally since the second quarter of 2015, with the U.S. accounting for $99.3 billion, or 62% of all EMU deals globally,” Watt said. He added that demand for natural gas in Asia has prompted dozens of U.S. and Canada export projects for liquefied natural gas (LNG).

Not all of those will get built, but the industry is working to make natural gas a global product in the next decade. On the oil side, Watt sees the U.S. poised to take over the role of “swing producer” from Saudi Arabia when oil demand ebbs and flows. “While there are many geopolitical considerations before that becomes fact, the U.S. has the technical capability in place right now,” he said. “The U.S. and Canada have the largest count of shale oil and gas fields, and, more importantly, infrastructure to extract those resources and get them to market. That’s not the case in other parts of the world.”

Trowbridge sees a major uptick in activity once crude prices rise to market-driven levels. “The whole industry is watching OPEC right now and waiting for the other shoe to drop as that group considers accepting Russia as a member nation,” he said. “Once that decision is made, life may begin to settle down again for the segment. If crude prices top $50 a barrel, the oil/gas industry may begin to invest again in new operational capabilities.”

The Unknowns

While analysts may have an easier time predicting when and how crude prices will change, politics is a more difficult call.

“With the U.S.’ recent penchant for political leadership to discourage the EMU sector, the next election will have a major effect on our companies’ ability to continue to lead into the future,” Trowbridge predicted.

Indeed, as Mergermarket’s recent report points out, “the upcoming presidential election is creating significant uncertainty for the oil and gas sector,” noting the possibility of a “veritable avalanche” of energy regulations, including the EPA's proposed Clean Power Plan, which seeks to regulate greenhouse gas emissions from power generators.

Such new rules could have a detrimental impact on the current diversity in the U.S. power supply — the most cost-effective means of managing the inherent risks in fuel costs and technology performance in generating power,” IHS stated in a recent blog.

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