Oil & Gas M&A Outlook- We think consolidation of oil & gas companies is limited near-term but could pick up meaningfully
by late 2016 if "lower-for-longer" for commodities persists. Past M&A cycles for oil & gas producers
portends more activity. Currently, we think the bid-ask spreads remain too wide because sellers are
still optimistic about a commodity price recovery and US public company valuations reflect $62/bbl and
$3.20/Mcf. Take-out premiums (average 26%) would push valuations well above current strip prices.
- Buyers' dilemma provides some hesitation. Stock performance of buyers typically lag following an
acquisition announcement by 2-3% relative (range is quite wide). Over the next year, buyers typically
lag by another 4%, although many factors could contribute to the lower performance.
- Deal flow has picked up with indications of increased public company appetite. We expect most of
the deal flow to remain focused on the asset level, like high-grading acreage and asset swaps. Recent
signs show interest in public companies although that may remain limited yet. Recent activity includes
Anadarko's (APC) offer for Apache (AP), Woodside's (WPL) offer for Oil Search (OSH), Noble's (NBL)
acquisition of Rosetta (ROSE), and Royal-Dutch's (RDS) planned acquisition of BG Group (BG).
- M&A increases during extended troughs and mid-cycle upswings (chart, page 2). Sustained lower
commodity prices shrink bid-ask spreads with balance sheets/returns more challenged. We also see
more appetite by major companies to increase exposure to short-cycle opportunities from large projects
with less capital flexibility. This also allows for more sustainable dividends coverage. Core positions with
proven returns are finite so it pays to be opportunistic and not fall behind during the next cycle.
- The onshore resource plays are the likely target. US oil & gas assets are highly fragmented and
consolidation should improve efficiencies. We think the Permian Basin is ripe for consolidation due
to the large resource opportunity, high well returns, favorable regulatory environment, and growth
potential. The basin produces 1.6+ MMb/d and could increase to 4-5 MMb/d in the next decade with
better oil prices.
Large scale buyers: (top resource holders on page 3)
• Chevron (CVX): Desire as capex needs wind down (2017+) but currently balance sheet limits a large
transaction in our view. Might prefer to consolidate in the Permian rather than adding a new basin.
• ExxonMobil (XOM): Large enough to acquire with scale but we believe the bid-ask is too wide now.
General lack of scale in shale an investor concern and we think XOM wants more shale exposure.
• Woodside (WPL): A hunter in the M&A game. The lack of viable organic production growth has
become a focal point by investors.
• ConocoPhillips (COP). Vocal on more capital flexibility and plans to exit deepwater drilling. Likely focus
on bolt-ons but maybe a large deal at the right price. Has a good starter position in the Permian.
• Marathon (MRO). Shift from exploration to more onshore resource scale. We think the Mid-Con and
Permian could be target areas.
• Devon (DVN). Looking to add more core acreage in existing areas: Eagleford, Permian, Mid-Con, PRB.
Potential targets:
• Concho (CXO). Permian pure-play producing 149 Mboe/d with 700k net acres and 4 Bboe of resources.
• RSP (RSPP). Permian pure-play producing 25 Mboe/d with 63k net acres and 25+ yr core drill inventory.
• Marathon (MRO). Core Eagleford, Bakken, and STACK-SCOOP; stock trades at a discount to peers.
• EQT Corp (EQT). Appalachian gas resource in the core Marcellus/Utica with extensive midstream.