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Asian Financial Sector Hit Hard By Low Oil Prices
Asian Financial Sector Hit Hard By Low Oil Prices
Cheap oil can often be a double edged sword. On the one hand, it has been beneficial for the emerging global economies of India and China, who seized the opportunity to expand their strategic petroleum reserves (SPR), while on the other hand, it has created an economic crisis for energy dependent nations like Russia, Venezuela and Libya.
Gone are the days when oil majors would freely invest billions of dollars in mega projects, as shrinking revenues have created significant cost pressure that needs to be reduced first and foremost. So, at a time when most of the major oil and gas players are shying away from new investments, it was expected that mergers and acquisitions would be the best alternative to increase the market value, reduce operational costs and increase service portfolio. However, much to the dismay of industry experts and market watchdogs, 2015 has been pretty lackluster for mergers and acquisitions.
Related: Do Or Die For Mexico’s Neglected Oil Sector
According to reports from PWC, the total number of M&A deals in the U.S.-oil and gas industry for the first quarter of 2015 was lower (both in terms of deal value and volume) than the last quarter of 2014. There were 39 oil and gas deals (with each deal worth more than $50 million) worth a combined total of $34.5 billion in first quarter of 2015.
Out of this, there were only four mega-deals whose values were greater than $1 billion. Shell and Statoil were some of the few global energy players who showed any real inclination towards acquiring new assets. Shell is already in process of acquiring BG group and Statoil is rumored to be targeting US-based driller EOG. Apart from a handful of big deals, the mergers and acquisition market at present looks pretty dull.
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Last Two Times This Happened, Stocks Crashed
Last Two Times This Happened, Stocks Crashed
Global growth is languishing, corporate revenues too, but CEOs are trying to show they can grow their companies the quick and easy way. Cheap debt is sloshing through the system while yield-hungry investors offer their first-born to earn 5%. And this cheap debt along with vertigo-inducing stock valuations have created the largest M&A boom the US has ever seen, with May setting an all-time record.
There may be a sense of desperation among CEOs as the Fed’s cacophony evokes interest rate increases, the first since July 2006. So companies are issuing all kinds of cheap debt while they still can. Bond issuance has totaled over $100 billion per monthin the US for the past four months, the longest such streak ever, according to Bank of America Merrill Lynch.
And that record issuance doesn’t account for the booming “reverse Yankee issuance,” where US corporations take advantage of the negative-yield absurdity Draghi has concocted in Europe and issue euro-denominated bonds into European markets.
“Issuers should realize that the window to lock in low long-term yields for any purpose is closing,” Hans Mikkelsen, a senior strategist at BofA, wrote in a note, according to theFinancial Times. And so in May, M&A deals hit an all-time record of $243 billion.
The prior two record months: May 2007 ($226 billion) and January 2000 ($213 billion). Not long after those records were set, markets crashed with spectacular results.
May included Charter’s $90-billion acquisition of Time Warner Cable and Bright House. Charter will issue around $30 billion in junk-rated debt to accomplish this, likely the second largest junk-debt deal ever, behind that of TXU in October 2007, which is now in bankruptcy [read… Junk-Debt Apocalypse Later].
May also includes Avago’s $37-billion acquisition of Broadcom, the largest tech deal since the dotcom bubble blew up.
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