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Deal adviser sees energy M&A picking up cautiously in 'flight to quality'

Anincrease in M&A activity in the energy sector is expected in 2016 but withacquiring companies remaining cautious, a KPMG deal adviser said.

KPMGfound in a survey that 71% of energy executives expect to initiate two or more transactionsthis year, a sizable increase from 2015, when the oil and gas price collapseled to a near stall in activity. With banks tightening credit lines throughredeterminations anddebt-ridden companies realizing the downturn will not be over anytime soon,KPMG's Tony Bohnert said, the distance between what sellers are asking and whatbidders are willing to pay is shrinking.

"We'restarting to see the early signs of the pickup in activity that everyone expectedlast year," said Bohnert, deal advisory partner for energy, naturalresources and chemicals. "I think everyone now realizes this is alower-for-longer cycle in the business, and we don't expect any near-termimprovements."

Buyersare expected to remain cautious. KPMG's research indicated that 53% of thesurveyed executives are contemplating deals less than $250 million, while only28% are eyeing acquisitions that would be between $250 million and about $1billion.

"It'sa sign of the time, and people are trying to protect their balancesheets," Bohnert said. "Banks are also tightening up their [creditlines], and that's across the board, not just in energy."

Thecautious nature of the buyers, Bohnert explained, can be seen in theirdiscussions of what they are looking for in a potential acquisition.

"Forthe first time, [CEOs] picked strategic fit ahead of deal valuation [as theirprimary criteria]. It's a flight to quality," he said. "If I've gotlimited amount of capital amount of deploy, I'd better be darned sure I getsomething good. Who knows how long this downturn is going to go, and if I burnall my dry powder now and this lasts to 2018 or 2019, they could be saying,'Oh, gosh, what have I done?'"

Whenasked whether he was surprised that so many respondents are interested inmaking two or more deals this year, Bohnert said the market has changed andtraditional buyers are not the only interested parties.

"Youalso have [privateequity] guys; they're all over this. … You've got a lot ofnontraditional buyers. They all see a big opportunity in this," Bohnertsaid, adding that private equity firms have raised approximately $70 billion topursue distressed energy assets. "They smell blood in the water and reallywant to take advantage of this depressed situation."

KPMG'sreport said that 87% of the anticipated M&A activity would take place inthe U.S.

"TheUS is the most liquid and transparent market, especially with upstream oil andgas," Bohnert said. "There's a lot of factors that make itattractive, and with the shale boom and with the number of companies that havegotten into the market in the run-up, there's a lot to go out and pursue."