Strain shows but where are the deals?

Nearly 18 months into ‘lower for longer’ and the strain is beginning to show. This week alone, three independent E&P firms have gone bust — Swedish independent PA Resources, Canada’s Iona Energy and UK-listed Kea Petroleum all called it a day and have variously entered administration, begun liquidation proceedings or made other moves to slowly stop operating.

What connects the three is size — each is small-scale, dependent on one or two producing assets. Attempts to attract new investment — whether through farm-outs, joint ventures or, in Kea’s case, fundraising through online platform Kickstarter — got stymied by reluctance on the part of counterparties, and that meant there was no money left.

Also this week, Kazakhstan producer Tethys managed to hang on after agreeing an investment deal that allows it to pay off some outstanding debts. The firm had warned that failure to secure the deal — worth just $15mn — would mean it didn’t have enough money to see out the next year.

Those explorers that were able to bulk up have reaped the benefits. Det Norske leapt up the food chain when it bought the Norwegian assets of US firm Marathon Oil last year. Prior to that deal, Det Norske was producing around 2,300 b/d of oil equivalent (boe/d), about the same as PA Resources. Afterwards its output was above 62,000 boe/d. With the added financial flexibility that this step change brings, this week it agreed to buy Premier Oil’s Norwegian assets — a deal that in turn allowed Premier to pay down its debt.

And debt is also a problem — nowhere more so than in North America.  Nearly half of the high-yield oil and gas companies (those with a higher risk of default) are trading at distressed levels, according to M&G Investments — only the metals and mining sector has a larger percentage. There have been dozens of bankruptcy filings in past 12 months in the North American oil patch.

Despite all this, levels of M&A activity remain low. But if not now, when? Atlantic basin benchmark North Sea Dated is scraping around near seven-year lows, and US marker WTI has today fallen below $40/bl for the first time since New Year’s Day 2009. Company valuations should be such that deals can be made.

It may be the second problem — debt — that is preventing companies from addressing the first —scale.

The failure of US independent Anadarko’s move on its peer Apache is emblematic of the issue. It would have been the first large US shale industry merger since the plunge in oil prices, and would have had repercussions in Europe as well, given Apache’s self-trumpeted presence in the North Sea. Apache “summarily rejected” the move, suggesting there remains a substantial gap between the valuation of buyers and of sellers.

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