Is The Oil And Gas Fire Sale About To Start?
Much has been written about the mounting pile of debt for U.S. oil companies (not to mention the well-known Brazilian oil giant).
Not that long ago, many oil and gas companies secured at least a part of their revenue by hedging contracts. Bloomberg already reported in June that many of these companies saw their artificial safety nets vanishing as oil prices failed to recover. One month later, we heard such morale boosting terms as ‘frack now, pay later,’ which were merely a bold move by struggling oil services companies to encourage cash strapped oil and gas companies to continue operations.
Simultaneously, we witnessed the bankruptcies of companies such as Samson Resources, Hercules Offshore and Sabine Oil & Gas Corp. These bankruptcies put the industry on notice. The cash flow situation for the entire oil and gas sector looks outright grim. Credit rating agency Moody’s expects a sector wide negative cash flow of $80 billion and is expecting spending cuts to continue next year. See figure 1 below for an overview of industry income and spending.
Related: Tanker Companies Profiting From Low Oil Prices
Image source: Reuters
(Click to enlarge)
Summing it up, debt, negative cash flows and the outlook for oil prices have led weak companies with balance sheets to a divest in a big way.
Although we have witnessed a couple of noteworthy acquisitions in the last months, which put 2015 in the books as a year with high volume takeovers, we cannot yet speak about an absolute M&A boom.
One of the most important reasons holding back takeovers of entire companies is the oil price volatility we have seen in the last few weeks. Financially stronger oil and gas companies seem to have postponed takeover plans and are now focusing on the acquisition of promising land holdings. Nonetheless, it seems that both buyers and sellers are preparing themselves for what could turn out to be a fire sale.
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