More money, more problems: Oil prices, M&A activity and competition

As the US oil market plunges toward the end of 2015 — and the end of the incredibly profitable hedges many large producers held throughout the year — investment capital is assembling on the sidelines, ready to pick off those who can’t make sub-$60/b work without those hedges.

And it’s not just the producers. Though many midstream companies will pointedly say that they have volumes fixed to term contracts and therefore aren’t exposed to fluctuations in price or production, most have at least some spot volume on their pipelines. And if a business is distressed, several analysts have said there’s plenty of capital waiting to snatch up those companies.

“Everyone is looking to buy, thinking that oil prices a couple years down the road will recover,” Lipow Oil President Andy Lipow said.

But all that money might actually negate the buyer’s advantage the oil downturn would otherwise offer.

“Hedges are about to roll off here, and people are very lightly hedged in 2016,” EnCap Flatrock Managing Director Morriss Hurt said at Hart Energy’s Midstream Texas conference late last month. “I think you might see some distressed sellers, but I don’t know if you're going to see distressed prices, because there's so much capital available.”

On top of that, many midstream companies are funded through private equity, which means they don’t face pressure from public stockholders. Those companies may be equipped to hold out for a better market, Lipow said.

Plains All American CEO Greg Armstrong said in the company’s second-quarter earnings call that while his company had bid on upwards of 20 acquisitions, it was being outbid by as much as 50% because of capital readily available in light of “irrational optimism.”

“If they can raise money cheaply, then they can, they push that issue out for a couple of years.” Armstrong said. “If the answer is that has come to a halt, well, I think we're in great position to take advantage of our strong balance sheet and operating synergies that are fundamental to our business and give us a competitive advantage.”

Armstrong expects that Plains will be more active in the acquisitions market in the next two years than it was in the last two, he said.

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Executives at Enterprise Products Partners, another midstream company, said that while there are plenty of acquisition opportunities, Enterprise probably wouldn’t win deals when there’s a lot of buy-side competition.

“If there is a crowded field with a lot of people that don’t have other alternatives, they are probably going to get the deal,” CEO Michael Creel said.

Enterprise made two acquisitions earlier this year, buying assets from Pioneer in the Eagle Ford and getting Gulf Coast terminal infrastructure through an Oiltanking Partners merger, but Creel said he doesn’t think Enterprise will replicate that activity in 2016.

“Those were assets that don’t come around every day. If you look at our acquisitions over the last 15 years, they tend to be very lumpy. They’re when assets that are very attractive to us come around at prices that make sense. I wouldn’t place high odds on that happening again in 2016,” Enterprise CEO Michael Creel said. “We don't just buy things to get big.”

And other market participants share that view — that acquisitions are going to be a special case. When predictions for a recovery fluctuate every other week, when the view of the market is so volatile, capital will be raised “on the condition of ‘it’s a good deal,’” said Tudor, Pickering, Holt Managing Director Brandon Blossman at the Hart conference.

“It sounds counterintuitive, but when price volatility comes to the market, M&A activity comes to a standstill,” Blossman said.