The Massive Energy M&A Cycle Could Be Arriving Soon

• Oil investors are watching for the beginning of the M&A boom that typically accompanies downturns in crude prices.
   
• The "lower for longer" price outlook may be delaying the beginning of the M&A boom because buyers believe they can remain patient for now.
   
• Bernstein believes that the best E&P buyout targets are the ones with qualtity resources and distressed balance sheets.
  
   

Nearly a year and a half into the downturn in oil prices, investors are still watching for signs of stability in crude prices and indications that the current oil cycle has reached its bottom. One of the most reliable signs of oil market bottoms during previous cycles has been a boom in M&A activity in the industry.

In a new report, Bernstein analyst Neil Beveridge looks at when the oil & gas M&A cycle will commence and which companies are potential buyout targets.

Luxury of patience
According to Beveridge, the lack of M&A activity at this point in the downturn indicates that potential buyers are not yet convinced that the market has bottomed and still believe they can afford to be patient. The “lower for longer” outlook for oil prices suggests that buyers are not currently at risk of missing a big bounce back in oil prices any time soon.

Identifying targets
Beveridge believes that the coming energy M&A cycle will be similar to past cycles in that the best buyout targets will be resource-rich companies with stretched balance sheets. “Already it is ‘cheaper to drill in the stock market than the ground,’” he explains.

The candidates
Beveridge notes that picking out specific buyout targets can be a difficult undertaking, but Bernstein believes that companies with interim CEOs or transitional management in place are more likely to agree to a buyout. The firm’s top four North American E&P buyout targets are Occidental Petroleum Corporation OXY, Devon Energy Corp DVN, Anadarko Petroleum Corporation APC and Encana Corporation (USA) ECA.

Disclosure: the author holds no position in the stocks mentioned.