Why is Energy M&A Plunging?

Mergers and acquisitions in the energy industry continue to plunge. Here’s one reason why that might be the case.

Apr 9, 2014 at 10:22AM

Devon Energy Hornriver Ca

Photo credit: Devon Energy. 

Oil and gas companies spent just $33.4 billion on mergers and acquisitions in the first quarter. While that might sound like a lot of money, it's actually 28% lower than the average quarterly M&A activity over the past three years. Overall deal volume is also 27% lower. Let's take a quick look at some of the recent deals and then consider why activity might be slowing.

Notable deals
There were only two big deals of note in North America last quarter. Devon Energy (NYSE:DVN) sold its Canadian conventional assets to Canadian Natural Resources (NYSE:CNQ) for C$3.125 billion. Separately, Energy XXI (NASDAQ:EXXI) agree to acquire EPL Oil & Gas (NYSE:EPL) for about $2.3 billion. Other than that, the quarter saw only a sprinkling of small bolt-on acquisitions.

Investors had expected the Devon Energy deal as the company recently spent $6 billion to acquire a position in the Eagle Ford shale. Devon had said it would sell some of its Canadian assets, as well as some of its U.S. non-core resources, to help to pay for the Eagle Ford deal. Canadian Natural Resources paid a nice premium for the complete package of Devon's Canadian assets. It's a deal that makes strategic sense for both companies.

Energy XXI's deal to acquire EPL Oil & Gas also makes strategic sense. It will grow Energy XXI's scale in the Gulf of Mexico, add a number of visible growth assets, and be highly accretive to earnings. Furthermore, as the following slide shows, EPL's assets really fit in with those owned by Energy XXI.

Energy Xxi Epl Merger

Source: Energy XXI Investor Presentation (Link opens a PDF). 

What, no shale?
What's interesting about these two deals is both involved conventional oil and gas assets, not shale assets. Outside of a few deals by the former CEOs of early shale leaders, it was a largely quiet quarter in America's shale plays. That's a big shift from recent M&A activity in the energy sector, which has focused around shale resources. Is this just a lull in the market or a sign of things to come?

 Oil And Gas Stocks To Buy Now Devon Energy

Photo credit: Devon Energy 

We're seeing a lull while companies decide which direction to grow in the future. This is happening not only in the acquisition market, but in capital spending, too. For example, there has been quite a pullback in the offshore drilling segment -- energy companies aren't committing to signing new contracts for offshore drilling rigs. One reason for that is because Big Oil is drowning in expensive projects due to capital spending that has gotten out of control. Big Oil also has had a problem making money from shale because it can't match the cost advantage of smaller rivals.

This has taken Big Oil largely out of the acquisition market. Instead, we're likely to see the oil majors unload assets in order to clean up bloated portfolios. There aren't as many buyers at the moment, as most shale-focused energy companies have enough drilling inventory to keep busy for a decade or more. In fact, that inventory continues to grow due to down-spacing and the discovery of additional layers of hydrocarbons.

Investor takeaway
It doesn't appear that the industry is ripe for an uptick in merger and acquisition activity anytime soon. Big Oil has turned its focus to actually making money, while most shale-focused players already have plenty of growth opportunities. Unless someone starts a consolidation wave, don't look for much M&A excitement coming out of the energy patch in the near future.

OPEC is absolutely terrified of this game changer
While energy M&A is slowing down, that doesn't mean the sector lacks excitement. One company could line your pocket with profits thanks to a new technology that's terrifying OPEC. In an exclusive, brand-new Motley Fool report we reveal the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock.


Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers