WMB Williams Companies Inc

By Dana Mattioli And Dana Cimilluca 

The sharp decline in oil prices in the past year has put a damper on many big energy producers' prospects, but that hasn't kept them from joining the gusher of mergers-and-acquisitions activity.

There have been $323 billion in announced or proposed oil-and-gas mergers so far this year, the most on record for a similar period by nearly $100 billion, according to Dealogic. Oil and gas is the third-most-active sector for M&A this year and has helped drive overall announced deal volume to $3.2 trillion world-wide, putting 2015 on pace to roughly match the record of $4.3 trillion set in 2007.

A handful of megamergers has been responsible for most of the surge in energy deal volume. On Monday, Energy Transfer Equity LP said it would buy pipeline operator Williams Cos. for roughly $32.6 billion, in the year's tenth-largest deal overall. In August, Schlumberger Ltd., the world's largest oil-field-service company, announced that it is buying smaller rival Cameron International Corp. for $12.7 billion. The year's largest deal in any industry is Royal Dutch Shell PLC's roughly $70 billion pending agreement to buy BG Group PLC.

"The big deals that we've seen have all had strategic merit, a consistent message from management and synergies that justify paying a premium," said Dan Ward, co-head of Deutsche Bank AG's global natural-resources group. "They've been done by large, best-in-class, well-capitalized companies that can afford to be bold," he added.

M&A activity in the oil-and-gas sector has continued apace despite a nearly 60% decline in oil prices since early last year.

When companies are under pressure, the value of the so-called cost and other synergies that come from combining with rivals increases, said Jay Horine, head of North American energy investment banking at J.P. Morgan Chase & Co. There also is a natural desire to get larger during such periods because bigger companies typically outperform smaller peers when times are tough.

"When oil prices go down like this there is always pressure to consider mergers," Mr. Horine said. "There's a bit of a lag where companies hope that oil will go back up, and then there are deals."

In the third quarter, merger volume across sectors reached $1.1 trillion, with oil and gas accounting for $78 billion. That is a 19% increase in overall volume from the year-earlier period, as companies, encouraged by strong equity markets and cheap debt, continued to strike deals at a rapid clip.

Unlike other industries that have been active--health care is the top M&A sector in the year to date, with more than $499 billion in announced deals, followed by technology, which has notched $384 billion, according to Dealogic--oil-and-gas companies have faced hostile market conditions all year.

Mirroring a trend in the overall merger market, the number of oil-and-gas deals has been depressed as many weaker companies don't enjoy the option of selling themselves or making acquisitions as the course of oil prices remains unpredictable. That has created an unbridgeable gap in many cases between buyers who are afraid of further declines and sellers mindful of the prospect of a sharp recovery.

Oil producer Whiting Petroleum Corp., for example, called off an auction of the company this year when it couldn't come to an agreement with bidders. Since then, Whiting shares have tumbled by more than 50%, slashing its market value to $3.1 billion.

There have been just 755 deals among oil-and-gas producers so far this year, according to Dealogic. This time last year, there were nearly 1,200 deals despite dollar volume of $195 billion.

Companies steering clear of M&A have in many cases turned instead to share and debt sales to shore themselves up. But such moves may be getting harder, as drilling contractor Weatherford International PLC found late in September when it was forced to abandon efforts to raise about $1 billion from shares and convertible bonds after investors balked.

The ground should become more fertile for weaker companies when crude prices stabilize--even at the current level of about $45 a barrel, bankers say.

"Opportunities for self-help are going to run out, so the benefits from smart, strategic transactions will increase," said Deutsche Bank's Mr. Ward. Strong players looking to boost efficiency could usher in another golden era for energy M&A like in the late 1990s, when landmark deals like combination of Exxon and Mobil were struck, he said.

The question hanging over the deal market now is whether in the balance of 2015 it will surge to a record, or if recent market declines will slow it down. The market faces a number of headwinds--mainly stemming from broader market disruption--including a recent reversal of the tendency of investors to buy shares of companies announcing acquisitions and resistance of bondholders to the terms in recent auctions of debt backing takeovers.

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(END) Dow Jones Newswires

September 30, 2015 12:19 ET (16:19 GMT)

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