What happened
Crude prices continued falling apart this week, slipping to a 10-month low of around $42 per barrel on continued oversupply concerns. That sell-off pushed oil deeper into bear market territory after it declined more than 20% over the past several weeks. Unsurprisingly, oil stocks traded lower this week.
That said, news about mergers and acquisitions (M&A) overshadowed the drop in the oil market for some stocks. Natural gas driller Rice Energy (NYSE: RICE), for example, surged more than 28% after agreeing to merge with EQT Corp. (EQT 3.82%) in a deal that will create the largest gas producer in the country. Meanwhile, troubled oil-field service companies Basic Energy Services (BASX) and Key Energy Services (KEG 215.06%) moved double digits on rumors that they're discussing a merger.
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So what
EQT Resources sealed a deal this week to buy Rice Energy for $6.7 billion. The transaction will unite two of the largest low-cost producers in the prolific Marcellus and Utica shale plays, creating an "unparalleled leader in shale gas development." EQT anticipates that the combined entity can deliver compound annual production growth of more than 20% through the end of the decade, thanks in part to the synergies captured in the transaction.
One other wrinkle of this deal is that it will enable EQT to grow its master limited partnership EQT Midstream Partners (EQM) via drop-down transactions of midstream assets currently owned by Rice Energy. That decision is bad news for Rice Energy's MLP Rice Midstream Partners (NYSE: RMP), which lost its growth engine since it would have been the recipient of those drop-down assets. Because of that, Rice Midstream Partners' units crashed this week, falling more than 27%. However, with EQT acquiring Rice's interests in Rice Midstream Partners in the deal, it's likely that it will eventually merge that entity into EQT Midstream Partners to cut out duplicate costs.
Meanwhile, M&A rumblings caused shares of Basic Energy Services and Key Energy Services to trade in opposite directions this week, with the former plunging 12% while the latter popped nearly 10%. Driving those divergent trading prices was a report by Bloomberg that Basic Energy Services was in talks to acquire Key Energy Services in an all-stock deal. The tie-up would unite two service companies that collapsed under the weight of debt during the oil market meltdown, with both declaring bankruptcy last year, though each reemerged at the end of the year with better balance sheets and improved cost structures. That said, with crude prices weakening again, a combination of the two companies would result in increased scale and the ability to capture cost synergies, enabling the combined entity to better compete in what remains a challenging oil market. While there are no assurances that the companies will announce a deal, the combination certainly makes sense.
Now what
When oil and gas prices are running high, energy companies focus on volume over costs. However, when prices tumble, it shifts their attention back to costs. One quick way to drive out costs is to merge with a rival and capture the cost synergies. That's why we're starting to see a pickup in M&A activities in the energy sector, which could gain steam in the weeks ahead if crude prices remain under pressure.
