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Low Oil Prices Spur M&A Activity: Top 5 Energy Deals of 2016
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As low oil prices continue to plague energy industry for the third successive year, the mergers and acquisitions (M&A) market has remained busy. The flurry of such activities in recent times suggest that stronger companies are lining up to buy the weaker ones.
Low Oil Driving Sector Consolidation
Oil’s horror show has seen black gold’s price come down from some $110 per barrel in mid-2014 to around $48 now, in between falling to a 12-year low of $26.21 in February. The commodity’s collapse has threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.
In these trying circumstances, merger and acquisition deals have helped service providers to cut their average costs and benefit from mutual technical expertise exchange.
Here is an overview of the five major proposed energy deals from 2016:
1. General Electric-Baker Hughes
The $30 billion merger between industrial conglomerate General Electric Co. (GE - Free Report) and oilfield services behemoth Baker Hughes Inc. , announced on Oct 31, is one of the highest valued deal among energy firms in recent times. The merger – combining General Electric’s ‘Oil & Gas’ business with Baker Hughes – will create an entity with unrivalled mix of service and equipment capabilities with operations in over 120 countries. The transaction is expected to close in mid-2017, subject to mandatory regulatory approvals and other closing conditions.
The complementary products of the involved companies are anticipated to provide better solutions to customers alongside creating cost synergy. While erstwhile shareholders of Baker Hughes will hold 37.5% of the new company, the remaining 62.5% interest will be held by General Electric investors. (Read more: Baker Hughes Inks Deal with GE to Form $32B Entity.)
2. Spectra Energy-Enbridge
In Sep, leading midstream energy companies Spectra Energy Corp. (SE - Free Report) and Enbridge Inc. (ENB - Free Report) decided to merge in a $28 billion all-stock deal. Enbridge will have 57% ownership in the combined group and Spectra Energy will have the remaining 43% interest.
The transaction – expected to close by Mar next year – will form one of the largest global energy infrastructure firms with the amalgamation of the two companies’ highly complementary platforms. With a diverse base of assets that comprises crude, liquids and natural gas pipelines along with terminal and midstream operations, the merged entity will be able to reach key supply basins and markets. (Read more Spectra Energy, Enbridge Enter into $28 Billion Merger Deal.)
3. Sunoco Logistics-Energy Transfer
Mergers in the energy space picked up further pace when energy pipelines and terminal operator Sunoco Logistics Partners L.P. announced on Nov 21 that it would acquire larger rival Energy Transfer Partners L.P. in a unit-for-unit transaction worth $21.3 billion. The deal is expected to close early next year, subject to approval by shareholders of Energy Transfer, and other customary closing conditions.
The Sunoco Logistics-Energy Transfer transaction is expected to create several commercial synergies, and result in $200 million worth of annual costs savings by 2019. The deal is also likely to strengthen the financials of the combined organization by making use of cash distribution savings to lower debt and to finance a portion of the growth capital expenditure programs of the combined entity. (Read more: Sunoco Logistics Inks Deal to Buy Energy Transfer for $21B.)
4. TransCanada-Columbia Pipeline
Then we come to North American energy infrastructure major TransCanada Corp.’s (TRP - Free Report) purchase of U.S. midstream operator Columbia Pipeline Group Inc. for $13 billion, including the assumption of $2.8 billion in debt. The buyout was announced in Mar and completed in Jul. TransCanada currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
TransCanada has been able to expand its already impressive transmission network with Columbia Pipeline’s strategically located assets. Apart from scale advantages and increasing Calgary, Alberta-based TransCanada’s network reach, the Columbia Pipeline buy has helped the company gain C$9.6 billion in near-term commercial projects and is set to deliver significant shareholder returns over the coming years. (Read more:TransCanada to Snap Up Columbia Pipeline for $13B.)
5. FMC Technologies-Technip
In May, oilfield service players FMC Technologies Inc. (FTI - Free Report) and Technip SA announced that they are merging in an all-stock deal of equal proportions. The tie-up – which should close early next year – would combine Houston-based FMC Technologies, a major underwater energy equipment maker, with Paris-based Technip, an offshore oil and gas field developer.
Post-merger, Technip investors will own around 50% of the combined firm while FMC Technologies shareholders will own the remaining half. The combination of Technip and FMC Technologies, two of the best-known names in oilfield services, will create an energy technology powerhouse. (Read more: More M&A in the Oil Patch: FMC Tech, Technip Combine.)
Are More M&A in the Oil Patch Coming?
A prolonged period of low oil prices will eventually lead to ‘survival of the fittest.’ Larger companies – especially those with cash to spend – are set to take advantage of this opportunity and buy quality assets at cheap valuations. The most vulnerable companies are the ones with increasing levels of debt and distresses assets.
Therefore, with oil still below the psychological $50-a-barrel threshold, energy investors should brace themselves for more M&A activities to unfold.
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Low Oil Prices Spur M&A Activity: Top 5 Energy Deals of 2016
As low oil prices continue to plague energy industry for the third successive year, the mergers and acquisitions (M&A) market has remained busy. The flurry of such activities in recent times suggest that stronger companies are lining up to buy the weaker ones.
Low Oil Driving Sector Consolidation
Oil’s horror show has seen black gold’s price come down from some $110 per barrel in mid-2014 to around $48 now, in between falling to a 12-year low of $26.21 in February. The commodity’s collapse has threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.
In these trying circumstances, merger and acquisition deals have helped service providers to cut their average costs and benefit from mutual technical expertise exchange.
Here is an overview of the five major proposed energy deals from 2016:
1. General Electric-Baker Hughes
The $30 billion merger between industrial conglomerate General Electric Co. (GE - Free Report) and oilfield services behemoth Baker Hughes Inc. , announced on Oct 31, is one of the highest valued deal among energy firms in recent times. The merger – combining General Electric’s ‘Oil & Gas’ business with Baker Hughes – will create an entity with unrivalled mix of service and equipment capabilities with operations in over 120 countries. The transaction is expected to close in mid-2017, subject to mandatory regulatory approvals and other closing conditions.
The complementary products of the involved companies are anticipated to provide better solutions to customers alongside creating cost synergy. While erstwhile shareholders of Baker Hughes will hold 37.5% of the new company, the remaining 62.5% interest will be held by General Electric investors. (Read more: Baker Hughes Inks Deal with GE to Form $32B Entity.)
2. Spectra Energy-Enbridge
In Sep, leading midstream energy companies Spectra Energy Corp. (SE - Free Report) and Enbridge Inc. (ENB - Free Report) decided to merge in a $28 billion all-stock deal. Enbridge will have 57% ownership in the combined group and Spectra Energy will have the remaining 43% interest.
The transaction – expected to close by Mar next year – will form one of the largest global energy infrastructure firms with the amalgamation of the two companies’ highly complementary platforms. With a diverse base of assets that comprises crude, liquids and natural gas pipelines along with terminal and midstream operations, the merged entity will be able to reach key supply basins and markets. (Read more Spectra Energy, Enbridge Enter into $28 Billion Merger Deal.)
3. Sunoco Logistics-Energy Transfer
Mergers in the energy space picked up further pace when energy pipelines and terminal operator Sunoco Logistics Partners L.P. announced on Nov 21 that it would acquire larger rival Energy Transfer Partners L.P. in a unit-for-unit transaction worth $21.3 billion. The deal is expected to close early next year, subject to approval by shareholders of Energy Transfer, and other customary closing conditions.
The Sunoco Logistics-Energy Transfer transaction is expected to create several commercial synergies, and result in $200 million worth of annual costs savings by 2019. The deal is also likely to strengthen the financials of the combined organization by making use of cash distribution savings to lower debt and to finance a portion of the growth capital expenditure programs of the combined entity. (Read more: Sunoco Logistics Inks Deal to Buy Energy Transfer for $21B.)
4. TransCanada-Columbia Pipeline
Then we come to North American energy infrastructure major TransCanada Corp.’s (TRP - Free Report) purchase of U.S. midstream operator Columbia Pipeline Group Inc. for $13 billion, including the assumption of $2.8 billion in debt. The buyout was announced in Mar and completed in Jul. TransCanada currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
TransCanada has been able to expand its already impressive transmission network with Columbia Pipeline’s strategically located assets. Apart from scale advantages and increasing Calgary, Alberta-based TransCanada’s network reach, the Columbia Pipeline buy has helped the company gain C$9.6 billion in near-term commercial projects and is set to deliver significant shareholder returns over the coming years. (Read more:TransCanada to Snap Up Columbia Pipeline for $13B.)
5. FMC Technologies-Technip
In May, oilfield service players FMC Technologies Inc. (FTI - Free Report) and Technip SA announced that they are merging in an all-stock deal of equal proportions. The tie-up – which should close early next year – would combine Houston-based FMC Technologies, a major underwater energy equipment maker, with Paris-based Technip, an offshore oil and gas field developer.
Post-merger, Technip investors will own around 50% of the combined firm while FMC Technologies shareholders will own the remaining half. The combination of Technip and FMC Technologies, two of the best-known names in oilfield services, will create an energy technology powerhouse. (Read more: More M&A in the Oil Patch: FMC Tech, Technip Combine.)
Are More M&A in the Oil Patch Coming?
A prolonged period of low oil prices will eventually lead to ‘survival of the fittest.’ Larger companies – especially those with cash to spend – are set to take advantage of this opportunity and buy quality assets at cheap valuations. The most vulnerable companies are the ones with increasing levels of debt and distresses assets.
Therefore, with oil still below the psychological $50-a-barrel threshold, energy investors should brace themselves for more M&A activities to unfold.
Confidential: Zacks' Best Investment Ideas
Would you like to see a hand-picked "all-star" selection of investment ideas from the man who heads up Zacks' trading and investing services? Steve Reitmeister knows when key trades are about to be triggered and which of our experts has the hottest hand. Click for his selected trades right now >>