Tuesday, November 25, 2008

Ready, Set, Action!

With the financial crisis in full-swing, people around the sector are gearing up for an active merger and acquisition space in the coming year.

When capital was free-flowing, companies borrowed. A lot. Now, overleveraged companies are scrambling to improve balance sheets. One sure-fire way to do this quickly is to sell assets. Some, however, are waiting, not wanting to let go of promising properties acquired only a short time ago for significantly higher prices. How long can they hold out?

And what about the smaller companies that partnered with oil majors when prices skyrocketed over the $100 mark? With prices skimming half that, companies that thought they hit the jackpot on signing day may now be wondering how they will keep up. The supermajors have money. On top of that, the supermajors can still get money.

When the bigger companies forge on with capital intensive projects, many of their partners will quickly run out of funds. How long do they trudge through with hopes of rebounding prices? Can they afford to bail on projects and joint ventures that served as the catalyst for their growth in the space? Can they afford not to?

For some companies, including those not partnered, the result will be buyouts by supermajors. Most companies these days are “trading at a discount.” Interesting phrase for what is essentially a negative position - for them anyway. For the big oil companies it is quite the opposite. The stage is set for huge M&A deals, the likes of which haven’t been seen since the late 90’s when oil dropped to around $10 a barrel. It was then that Exxon merged with Mobil and Chevron began its dealings with Texaco.

I’ve only been in the energy space four years. In that time I’ve come to recognize quite a long list of companies. My guess is that list may become a lot shorter in 2009.


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