Falling knife slashes shale dealmaking as buyers await bottom

[HOUSTON] When Whiting Petroleum put itself up for sale this month, the oil industry appeared on the brink of a deal surge that would dramatically redraw the energy landscape.

Instead, Whiting decided it was better off selling shares and borrowing more money to surmount a cash shortfall brought on by tumbling crude prices. The lesson? Takeover fever driven by the oil-market crash is yet to really heat up because share prices haven't fallen as fast or hard as crude.

It may be later this year or early 2016 before buyout candidates resign themselves to a long-term market slump and lower valuations, said David Zusman, chief investment officer at Talara Capital Management LLC.

"Nobody wants to catch a falling knife," Chris Pultz, portfolio manager of a merger-arbitrage fund at Kellner Capital in New York. "The last thing anyone wants to do is price a deal now, only to have oil fall to US$30 a barrel later on. There's a lot of skittishness."

Whiting, a potentially juicy prize as the biggest oil producer in North Dakota's Bakken shale, isn't the only one fending off bargain seekers. Tullow Oil, an Africa-focused group seen as a perennial takeover target, earlier this month tapped lenders to restore its finances. In North America, Encana, Noble Energy, RSP Permian and Carrizo Oil & Gas have sold new shares, effectively blocking deals.

For oil producers squeezed by heavy debt and a collapse in crude prices below $50, issuing new shares and rolling over old loans, when given the choice, remain lesser evils than a corporate fire sale. So far this year, the oil and natural gas sector has seen deals worth nearly US$1.9 billion, the lowest quarterly figure in at least five years, according to Bloomberg data. In the first quarter of 2014, energy deal making reached US$27.9 billion.

"Every time there's a market downturn, you always have this chorus of suggested interest in takeovers," said Vincent Piazza, global energy research coordinator at Bloomberg Intelligence in New York. "In reality, few deals of any consequence occur."

A disconnect between company valuations and the crude market is adding to buyers' uncertainty. Since Dec 15, stock values in an index of 20 US producers have bounced back an average 7 percent, even as oil fell another 15 percent to US$47.51 a barrel on Tuesday.

The price crash was so swift that many companies may be waiting for the market to stabilise before agreeing to major acquisitions, said Osmar Abib, who leads the global energy practice for Credit Suisse Group.

"You're going to see a much bigger flow of announcements in the second half of the year because by then, people will have adjusted to the new environment," Mr Abib said Tuesday in an interview.

Buyers and sellers need time to find common ground on valuations, Scott Sheffield, chief executive officer at Pioneer Natural Resources, said Wednesday in an interview at the Howard Weil Energy Conference in New Orleans.

"It's going to take at least mid-summer or late in the year for oil prices to bottom and to start going up again and for people to develop their own views," MR Sheffield said.

Much will depend on where oil prices settle. Sheffield said he sees a rebound to US$60 a barrel by the end of the year, with prices ranging from US$60 to US$80 over the next five years. A US$60 price over the long term will lead to more consolidation, he said.

Another possible deal-driver: the availability of capital from loans and equity offerings may dry up, particularly if the US Federal Reserve increases interest rates.

Companies that own drilling rigs and provide equipment and field services to the producers are most prone to consolidation during bear markets, Piazza said. During the last crude slump in 2009-10, 247 oilfield-services deals with a combined value of US$32 billion dwarfed the 51 transactions among oil producers, which amounted to just US$6.6 billion, he said.

Money is certainly waiting in the wings for a flurry of acquisitions. The world's four largest buyout firms, including Blackstone Group and Carlyle Group, have amassed a US$30 billion war chest for deals.

"This is one of the best periods, if not the best, to invest in global energy," said Marcel van Poecke, head of Carlyle International Energy Partners.

Piazza of Bloomberg Intelligence said the biggest oil companies are more likely to snatch up individual assets and business units of smaller rivals, rather than acquire entire corporations. Exxon Mobil is among buyers indicating they're particularly interested in acquiring drilling assets that expand on their existing oilfields.

For those companies with an appetite for wholesale corporate takeovers, the best approach may be to bide their time, said Mr Pultz at Kellner Capital.

"You're not going to lose anything by waiting," Mr Pultz said. "You'll probably get it cheaper a few months from now."

WP