Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Anadarko Petroleum is the perfect symbol of the year in oil and gas M&A -- mainly because it didn't do much in the way of deals.

There has been a lot of talk about various deals for the company. For example, on an otherwise humdrum Monday, Anadarko's shares twitched higher on a report that China Petroleum & Chemical -- AKA Sinopec -- was proposing a takeover.

Anything is possible, and Anadarko doesn't comment on such rumors. Still, unless Sinopec has somehow forgotten what happened when compatriot Cnooc tried to buy Unocal in 2005, this looks like just a spot of pre-Christmas CFIUS trolling. Either that, or this is a way of nudging a more realistic suitor like Exxon Mobil to (finally) make a bid for Anadarko. Indeed, the previous big flurry of M&A excitement around the stock was last month, when Anadarko said it had talked about buying Apache -- an odd apparent bid to remain independent that touched off a share price slide that just made Anadarko a cheaper target.

It must be exhausting, and not a little frustrating, to be Anadarko's bankers. But the same can be said for oil and gas as a whole. Despite the energy price crash and all the pressure to consolidate that entails, 2015 has been a year of likely endless M&A pitches with few results. With just over a week to go, North American oil and gas M&A amounts to just $88.3 billion this year, which would be the lowest since 2004, according to figures compiled by Bloomberg. The year's average deal size of less than $200 million is also pretty weak stuff.

Keep Pitching
North American oil and gas exploration and production M&A has had an unusually quiet year
Source: Bloomberg

Yet, energy bankers should have hope for 2016. Why? It all has to do with the rather less-hopeful chart below.

Bleeding Indicator
The BofA Merrill Lynch High Yield Index shows the pressure building on balance sheets, especially in the energy sector
Source: Bloomberg

Mergers haven't taken off in the oil patch this year largely because potential targets have been banking on a rebound and potential buyers have been expecting further falls. The spike in yields for borrowers in the energy sector, along with the growing acceptance that oil and gas prices likely face another year on their back, should mean those opposing views finally converge in 2016, prompting some deals.

What's more, this chart suggests the advantage should lie with large, strategic buyers like the oil majors for two reasons.

First, one way potential targets have been shoring up balance sheets is to sell assets rather than the entire company. But a thriving asset market requires buyers being able to raise capital at reasonable rates, be they other E&P companies or private equity firms looking to snap up bargains. Asset sales have slowed already this year, with just $29 billion worth in North America, compared with $107 billion in 2014, according to data compiled by Bloomberg.

Second, with the cost of capital rising and cash harder to come by, any deals struck will require at least the promise of synergies and will favor those buyers able to use their own stock as a credible acquisition currency. One reason Anadarko's approach to Apache met with such scorn was that it scattered rather than tightened the company's focus. The majors, diversified anyway, bring the benefit of bigger balance sheets, which both alleviate any credit pressures weighing on the target and provide a clearer path to developing a smaller E&P company's reserves. Paying with shares also means that selling shareholders get to participate to some degree in the eventual recovery in oil and gas prices.

It looks like things may be heading this way already. Just 50 percent of North American E&P deals by value announced this year were disclosed as being all cash, down from 82 percent in 2014, according to figures compiled by Bloomberg. Stock and cash-and-stock deals, meanwhile, rose to account for a quarter of all deal volume, from just 12 percent last year. Cash is still king, but its scarcity is what will define the coming M&A wave in oil and gas.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net