Editor's pick: Originally published Jan. 15.
The new year hasn't exactly brought glad tidings to the oil and gas industry.
Oil prices briefly fell below a key threshold of $30 per barrel on Tuesday, prices not seen in 12 years. Royal Bank of Scotland analyst Andrew Roberts forecast in a doomsday report that Brent oil could fall further to $16 in the first quarter as demand drops and the world runs out of ships in which to store it. Last week Chevron (CVX) announced it was laying off 7,000 people, and BP (BP) followed up this week with 4,000.
"Even the strongest names, with the highest multiples, are starting to see some weakness," Wunderlich Securities analyst Jason Wangler wrote in a report this week titled No Fun in Energy.
Oppenheimer & Co. analyst Fadel Gheit added to the malaise, predicting on CNBC that half of all U.S. shale producers will be forced into Chapter 11. "The longer oil prices remain low, the more companies are likely to file for bankruptcy," he told The Deal, the most vulnerable being those with debt ratios above 40% and high break-even points.
An alternative? How about getting hitched? By combining assets, companies could cut duplicative functions, benefit from economies of scale and be better able to tap the capital markets.
A lot of folks were expecting a flood of corporate mergers and acquisitions in the sector last year. But the banks ended up going easy on oil and gas companies during loan re-determination time and companies were able to tap the capital markets in the first half of last year, which allowed them to live another day without having to sell assets or themselves.
As a result, M&A in the industry was down almost a quarter last year to $143 billion, according to figures out this week from data provider IHS. Analysis by oil and gas research firm Wood Mackenzie shows that 2015 was the slowest year for M&A in the sector in over a decade, with spending on deals collapsing by two-thirds, not including Royal Dutch Shell's (RDS.A) mammoth $82 billion purchase of BG Group.
With asset sales bringing in little money and financing options only available to the stealthy going forward, expect to see more combinations.
Gabriele Sorbara, an analyst at Topeka Capital Markets, thinks West Texas' and New Mexico's Permian Basin in particular will yield more M&A. His top takeout candidates include under-leveraged, high-quality names including Energen (EGN) , Diamondback Energy (FANG) , Parsley Energy (PE) , Pioneer Natural Resources (PXD) and Cimarex Energy (XEC) . He thinks mergers of equals will be common, such as a possible combination between Concho Resources (CXO) and Cimarex.
Analysts at Tudor, Pickering, Holt & Co. say excess costs have built up among five small companies operating in West Texas' Midland Basin, including Energen, Diamondback, Parsley, Laredo Petroleum (LPI) and RSP Permian (RSPP) , compared with larger competitors such as Concho and Cimarex, which could lead to some combinations.