Energy – Oil and Gas
The Energy sector comprises companies whose businesses are dominated by either of the following activities: the construction or provision of oil rigs, drilling equipment, and other energy related service and equipment, including seismic data collection. Companies engaged in the exploration, production, marketing, refining and/or transportation of oil and gas products, coal, and other consumable fuels. The energy sector continues to be buffeted by lower inventory reports and rumors of potential production freeze agreements in the Middle East. But crude oil prices have remained in the $40-$50 range that is believed to be fair value, at least for now. And while there is always a lot of speculative money involved in the energy space, which could lead to some continued violent price moves, it does seem like there are fundamental factors supporting an energy sector that is more in balance—U.S. production growth has finally started to decline, while U.S. demand has improved. Developing nations, including the U.S. will likely need more energy as they improve their infrastructure and modernize their economies. Although there are rising geopolitical tensions to be considered, these tensions, if sustained, could result in higher oil prices and improving sector performance. Coupled with the potential decrease in supply from countries including Saudi Arabia and Russia, trimmed or stabilized production is expected to further increase domestic growth in the Energy sector.
Value of Closed Domestic M&A Transactions ($mm)
Sector Performance vs. National GDP
Mergers and Acquisitions (M&A) in the U.S. Energy sector reached the lowest levels of fourth quarter deal activity in both deal value and volume. Accelerating declines in energy prices coupled with the closing of the capital markets for energy companies during the second half of 2015 drove management teams to focus on cash preservation. As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models. This internal focus resulted in a steady decline in energy deal activity leading to the lowest fourth quarter in five years, a period that is typically strong for energy deals. Looking forward, the outlook for 2016 remains cautious as the industry works through this downcycle. The industry has reigned in the momentum of capital programs in 2015 and may further reduce spending in 2016 as efficiency and returns dominate. Attractively priced public market capital may be less readily accessible, but private capital remains available for balance sheet repair and the pursuit of opportunistic M&A. While a continued lack of urgency to sell assets persists, those that can survive and take advantage of unique opportunities to acquire, should be best positioned to benefit from a recovery.