Energy M&A Slows as Oil Prices Accelerate

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"The higher crude prices go, the fewer deals will come."

U.S. M&A activity slowsColin Barr today wrote that Egypt could be a case study for peak export theory, under which oil prices would rise steadily until major importers like the U.S. plunge into recession. If he's correct, then we're about to see a major decrease in U.S. energy sector M&A activity. Buyers will get scared off in an environment where crude barrel prices regularly top $100 (or more).

But we don't need peak export theory to play out in order to see a decrease in energy M&A. Even at a crude price of $91/barrel, we should expect a slowdown.

Many energy market investors believe there is a crude-price equilibrium at which both buyers and sellers feel comfortable; that seems to be $75$85/barrel. Less perfect but passable M&A market conditions would be $60$90/share. Anything outside of thos e limits, however, and all bets are off.

Just take a look at Q310 when crude prices remained within the $75$85/barrel equilibrium. That quarter, the value of U.S. energy M&A was the second highest since 2006 with more than $56B of activity. Compare that to Q4, when prices spent all but one week above $85/share. Dollar volume tumbled more than 38%.

It's obviously possible that buyers and sellers could recalibrate their equilibrium math if prices were to remain steady at $90$100/barrel for several months. But that would take time, and it appears activity already has slowed.

Less than $1B of U.S. energy M&A transactions has closed so far in January. That figure rises significantly when announced deals are included but it still would be the lowest monthly figure in over a year.

So we've already got a slowdown. The only question now is a matter of degrees. The higher crude prices go, the fewer deals will come.

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