Last year, mergers and acquisitions in the U.S. oil and gas industry declined to the lowest level since 2005, with 160 deals completed despite booming oil and gas prices. Yet most of these deals were for top-quality assets at top prices. The industry was doing well and could afford billion-dollar mergers. Now, things are changing.
The Wall Street Journal reported recently that merger and acquisition activity in the U.S. oil and gas space had dropped off a cliff as natural gas prices plummeted. The predominantly warm winter and abundant supply thanks to strong overseas demand have combined to push benchmark prices to below $3 since December and, according to industry insiders, planned deals are being canceled or delayed.
According to Rystad Energy data cited by the Wall Street Journal, there are currently some 15 deals in the U.S. oil and gas space that face an uncertain future. Their combined value is $40 billion, and some of them may well remain unsold—especially if they focus on natural gas.
“I am well aware of multiple transactions that were in the works and stalled because gas prices have gone down. There were a lot of exits planned for this year and I think many of those may get delayed,” Guggenheim Securities senior managing director Muhammad Laghari told the WSJ.
One would think that with prices down, the companies put up for sale would agree to a lower price, but it appears that the sellers are not offering discounts while buyers are getting anxious about the future trajectory of gas prices. As a result, one planned acquisition of a U.S. gas company, Rockliff Energy, by a subsidiary of Tokyo Gas fell through. It would have been worth $4.6 billion had it gone through, but the drop in gas prices apparently put an end to it.
Private equity is also canceling its M&A plans in the U.S. natural gas space because of the price drop. It seems the cheaper natural gas is, the lower appetite buyers have for gas assets despite the upbeat outlook for future demand, specifically for U.S. natural gas.
Wood Mackenzie, for instance, recently forecasted that the U.S. could see new LNG export capacity worth $100 billion get built over the next five years. The consultancy said that “based on the combination of projects already under construction and momentum of potential projects, US LNG capacity could grow between 70 mmtpa and 190 mmtpa before the end of the decade, potentially more than doubling current exports.”
This certainly sounds like guaranteed long-term demand for that very same gas that currently sells for a little over $2 per million British thermal units and that last year hit $9 per mmBtu. Even with that guaranteed long-term demand, however, potential buyers remain reluctant to commit. Because uncertainty has always been the name of the game, but now it’s greater than ever.
The biggest source of guaranteed demand for U.S. LNG is currently Europe. Eager to switch its gas dependence on Russia to a dependence on the U.S., Europe is heavily leaning on liquefied gas, which it is buying on the spot market.
While there have been several long-term deals closed by European buyers of U.S. LNG, most of the volumes that the continent receives are sourced in the spot market. That’s because Europe, and the European Union specifically, has a reputation to uphold, and that’s the reputation of a bloc entirely dedicated to a net-zero future in which there is no place for fossil fuels.
This is the source of the uncertainty that has become the new normal in oil and gas. Despite clear evidence that the world still needs massive amounts of both oil and gas—and plenty of coal, too—the net-zero push of European and North American governments is casting a shadow over the long-term prospects of the industry and sapping acquisition appetite.
The oil and gas industry is a cyclical one, like all resource industries. A downturn is a great time to buy some quality assets on the cheap, normally. But in addition to the future uncertainty about demand, what with the West’s transition ambitions, there’s a much more immediate problem: financing.
The Fed’s aggressive take on inflation has led to much higher borrowing costs for buyers at a time when that same inflation is hurting sellers by pushing their costs higher. Sellers won’t sell on the cheap. Buyers can’t get cheap loans to buy expensive assets.
It’s an interesting situation that will likely get resolved when gas prices stabilize, according to the experts interviewed by the WSJ. When and at what level this could happen remains to be seen.