We all know that the value of energy stocks has plummeted due to falling oil prices. But this certainly has not slowed mega mergers and acquisitions (M&A) in the energy sector.
In fact, the low oil prices are likely to spur more consolidation in the field. Market analysts predict that mega M&A deals are more likely to occur now than at any point since the 1990s.
One such an example is the announcement of a merger between pipeline giants, Regency Energy Partners and Energy Transfer Partners. This $18 billion deal will be the birth of the 2nd largest energy infrastructure company in the country.
Make no mistake, these types of M&A deals are certainly big business, making some financial dealers semi-celebrities.
For Energy Transfer partners, this transaction will not only strengthen the company’s balance sheet but also put it in a favorable position to pursue more acquisitions. As the cheaper oil and gas take a toll on the finances of smaller companies in the energy sector, a flood of assets are sure to hit the market. Processing units, storage tanks and pipelines may now reach the market at cheaper prices as oil producers put assets up for sale to help finance drilling operations. It is also very likely that smaller pipeline operators may eventually decide to cash out rather than compete with Energy Transfer.
Another reason for the Energy Transfer-Regency Energy merger is to put the new company within easy reach of the Utica and Marcellus shales and establish it as a major player. For Regency, the merger also proves positive as the changes in capital markets and the current volatile commodity prices made it evident that the company needs more diversification and scale in order to grow. With Regency and ETP consolidating their midstream operations in the West Texas and Permian areas, combining their operations under the same roof can be of great value for both companies.
This type of consolidation among infrastructure providers and energy explorers is likely to occur more often in 2015. It is a simple survival tactic: in order to improve balance sheets and reduce costs, more firms may decide to combine their operations. Another example of a mega merger that took place recently is that of Baker Hughes and Halliburton, a $34.6 billion deal that, just like the Regency-ETP deal included a large stock consideration. This means that the merged companies may also benefit from a rise in stock performance after the deal completes. In the Baker Hughes-Halliburton merge, analysts were surprised by the fact that a large portion of the deal (36%) came in stock, but this yet again highlights the importance of getting transactions like this through quickly to help stockholders recover.
Although ETP will assume $6.8 billion in net debt from Regency, the merger will not create a lot of new debt and it shouldn’t impact ETP’s credit ratings, while Regency gets a major upgrade. Through this deal, both companies have the opportunity to shore up their balance sheets and boost future M&A prospects. This also continues the trend of MLPs to use deals like this to redo financial arrangements between general partnerships and publicly traded limited partnerships.