Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

The plunge in crude prices couldn't rattle the two biggest pending oil mergers: Shell won shareholder support Wednesday for its $64 billion takeover of BG, which sent both stocks rising. And Energy Transfer was said to be plowing ahead with plans to acquire Williams Cos. in another multi-billion-dollar deal. In other words, it wouldn't have been a half-bad day for the oil news cycle.

Except that, well, 400 other energy companies may go belly-up

This grim prediction came from Larry Fink, chairman of BlackRock, the world's biggest money manager, who was speaking at a New Jersey event Wednesday, just as Shell and BG shareholders were celebrating their deal getting finalized. I'm sure he didn't mean to spoil the mood -- a sanguine moment during a painful time for the industry. 

The Shell-BG merger is becoming, rightly or wrongly, a bastion of hope for investors who have watched their oil holdings get pummeled. 

The Plunge
Energy has been the worst performing sector in the S&P 500 for the past 12 months. The basket posted its worst return last year since 2008, as did these two big exchange-traded funds.
Source: Bloomberg

A few analyst reports leading up to and after the Shell shareholder vote described the combined company as being more "resilient" to low crude prices. It's an interesting word choice that shows how this industry has been put on the defensive in the middle of a merger wave in which other sectors, such as pharma and food, are instead looking to capture growth and take market share. Brent crude has fallen about 40 percent since Shell and BG announced the transaction last April. 

As some energy producers begin to slash their shareholder payouts, however, Shell assures it can maintain its dividend in 2016 and that the deal will add to cash flow regardless of how oil trades. As of Wednesday, analysts were projecting that Shell's stock will climb nearly 30 percent in the next year, which is among the biggest potential gains for North American or European energy companies valued at more than $10 billion, according to data compiled by Bloomberg.

Of course, things aren't so rosy at Energy Transfer and Williams, even though their deal seems to be on track. There's concern about Energy Transfer taking on $6 billion of debt to fund part of the acquisition, and some analysts have suggested adjusting the terms to equity only (which wouldn't be welcome news for Williams' shareholders). Bloomberg's Matthew Monks and Jim Polson reported Wednesday that Energy Transfer is planning to move forward with the deal and its current mix of cash and stock.

M&A Falls Along With Oil Prices
2016 is off to a slow start, even as two big deals from last year near completion.
Source: Bloomberg
Includes all deals involving oil E&Ps, oilfield services providers and pipelines.

The obstacles that faced both these big transactions during such tough market conditions may keep peers from wanting to pursue big deals right now. For example, there's been a lot of talk surrounding Anadarko Petroleum, as Liam Denning wrote last month. In November, the $18 billion company confirmed that it made and subsequently withdrew a bid for Apache, which snubbed the approach. And then in December, there was a rumor that China's Sinopec was considering a bid for Anadarko. 

With the way things are going in oil, it seems like distressed sales among the smaller explorers and producers are more likely. More of what Fink was getting at. And the usual M&A mentality that cheap stocks lead to deals just doesn't apply to this industry right now, because oil companies are cheap targets only if their assets can be profitable at such low fuel prices, and many can't. 

Here's the big exception: Statoil, Norway's biggest energy company, purchased a 12 percent stake in Sweden's Lundin earlier this month to boost its access to Johan Sverdrup, a huge oilfield in the North Sea that may hold as many as 3 billion barrels of fuel. Bloomberg's Mikael Holter had a great piece explaining how oil's collapse could actually help make this an immensely profitable project, so long as prices recover by the time production is slated to begin in three years. 

The deal itself wasn't particularly large at about 4.6 billion kronor ($531 million), and it hasn't gotten much attention. But it's a smart move on Statoil's part and happened with rare ease. It shows what's required to make an oil deal work in this environment, and why we're seeing so few of them.

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

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net