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Cost of capital hangs over M&A market
Gary Park For Petroleum News
Mergers and acquisitions in the Canadian petroleum industry took a 64 percent plunge in the first nine months of 2008, before the financial world turned on its head, and will likely remain in the doldrums until market balance has been restored, according to an executive with an energy trust.
Calgary-based Sayer Energy Advisors estimates deal-making to the end of September totaled C$14.52 billion compared with C$39.47 billion in the same period last year, when four transactions in the C$5 billion-C$10 billion range were posted.
Daylight Resources Trust Executive Vice President Ten Hanbury said those in his peer group are unsure about the benefits of doing deals now, when they are worried about being able to finance 2009 capital budgets, but worried about holding back.
Once the industry moves into 2009 and companies start getting their engineering and year-end reports, more M&A action is possible if there is stability in commodity prices and equity markets, he said.
Enerplus Resources Fund Senior Vice President Ian Dundas said tough times in the current market will carry long-term implications for juniors, whose future continues to look viable, but on a smaller scale.
“Running small public companies in Canada is more expensive than it used to be and going forward I think you’re going to have fewer junior public companies,” he said. “Probably it will look a little bit more like it does in the U.S.”
Whatever else, Dundas is certain that assets coming on the market in the near term will be a “lot cheaper than they were in the past.”
Discounts quality based Crystal Holdershaw and Alan Tambosso of Sayer Energy agree M&A prices are headed downward as lending rates rise and shares prices of public companies fall.
But they cautioned that assets will not sell at a higher discount across the board, predicting that premium assets and companies will continue to realize prices at lower discounts.
The two analysts said companies like Duvernay Oil — which Royal Dutch Shell acquired for C$5.9 billion in cash in mid-summer — with focused asset bases and a lot of upside will continue to be attractive acquisition candidates and fetch lower discounts.
Assets of poor quality or widely scattered may not even attract prospective buyers. They said many analysts are predicting that if the economy emerges from the current recession with a period of inflation, interest rates will climb rapidly as they did in both the early and late 1980s, adding to the cost of capital and resulting in even higher discount rates for M&A transactions.
Whatever other factors come into play, the Sayer analysts are in no doubt that reduction in available capital caused by the global financial meltdown will result in lower M&A prices that will stretch well beyond the recovery of commodity prices.
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