Why a Great Wave of Consolidations Is Likely in the Energy Industry
Key Trends in Hedge Fund Activity and the Energy Sector
Two major deals worth $17+ billion recently announced
WPX Energy (WPX) announced that it entered an agreement to purchase RKI Exploration & Production LLC, a privately held firm, for $2.35 billion. This move enables WPX to gain access to the Permian Basin’s oil-rich assets at a great discount, given the current steep fall in crude oil prices.
This deal is the largest shale acquisition since the $2 billion deal by Noble Energy (NBL) for Rosetta Resources in May. WPX intends to lower its reliance on natural gas and stated that this deal would help increase the firm’s exposure to crude oil. Marathon Petroleum (MPC) announced its intention to purchase a natural gas processing company, MarkWest Energy Partners LP, for $15 billion.
Reserve values in the energy industry experience a steep fall
Future oil reserves are of great interest to buyers of oil and gas companies. According to a July 13, 2015, Bloomberg article by Bradley Olson, the average value of reserves for more than 50 US firms, measured as a ratio of the firm’s enterprise value to its future barrels, is at a ten-year low. This signifies great value for buyers.
Valuations for oil firms are less inflated
The average spread between valuations by analysts and share prices of oil firms is a harbinger of mergers and acquisitions activity. As this spread falls, deals tend to pick up. This spread has been falling this year, according to Bloomberg research, indicating the probability of a greater number of deals in the oil industry.
Investors who wish to gain exposure to oil exploration and production firms such as Anadarko Petroleum (APC) could consider investing in the Energy Select Sector SPDR ETF (XLE). APC has an exposure of over 3% in XLE.
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