Investors signal big-premium deals over after bad year for energy M&A

Bloomberg

After a fairly abysmal 2019 for US energy mergers and acquisitions, investors are signalling to oil executives and investment bankers that the days of big-premium deals are over.
Some of the year’s most notable mergers, including Occidental Petroleum Corp’s blockbuster takeover of Anadarko Petroleum Corp, were met with investor criticism and the sustained selling of the acquirer’s stock. Shareholders are demanding more discipline on spending from oil and natural gas producers after years of negative cash flow and disappointing returns that have left the sector out of favour.
“The market does not want to see large premium deals get done,” said Steve Trauber, Citigroup Inc’s global head of energy. “The market has reacted negatively, in some cases violently so, when those deals are announced.”
There has been $76.2 billion of mergers and acquisitions targeting US exploration and production companies in 2019, according to data compiled by Bloomberg. That’s the highest going back at least 21 years, but it’s skewed by the takeover of Anadarko for $53 billion including debt. While the deal count rose to 37 from 32 last year, it remained below the number of transactions seen at the start of the decade, when oil and and gas prices were higher.
“Generally it’s been a slow year for dealmaking,” said Brittany Sakowitz, a partner at Vinson & Elkins. “I see 2020 being a lot of the same.”
Only one major energy deal this year came with effectively no premium: PDC Energy Inc’s acquisition of SRC Energy Inc. It was also perhaps the only transaction between two public oil producers to be widely applauded by analysts and investors. Unusually for an all-stock takeover, the shares of the acquirer, PDC, surged on the day the deal was
announced.
When asked by one SRC shareholder why he didn’t get a premium for his stock, the company’s Chief Executive Officer Lynn Peterson replied that he had created a stronger, larger business with a lower cost of capital, according to Citigroup’s Trauber. An SRC spokesman confirmed that’s how Peterson has defended the merger. “That’s the mantra investors have and want to see,” Trauber said.
What investors don’t want are expensive deals. Occidental outbid Chevron Corp. and secured a $10 billion commitment from Warren Buffett to buy Anadarko.