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KPMG Says Smaller, Strategic Deals Will Drive Energy M&A Activity in 2016

While most executives in the U.S. energy sector believe robust merger and acquisition (M&A) activity will continue into 2016, the sector ranks near the middle of the pack among respondents overall, and several uncertainties remain, according to a report by KPMG LLP.

In a statement Monday that accompanied the release of its 24-page report, the "2016 M&A Outlook Survey," KPMG said 71% of energy executives it polled believe their companies plan to initiate two or more M&A transactions in 2016. Further, 53% of energy executives said they anticipate the future deals to be valued at under $250 million, while 28% say they could be valued at $250-999 million.

KPMG added that when asked what the most important factors are when evaluating a possible merger or acquisition, energy executives ranked strategic fit and growth potential at the top of the list. But the report added that despite increased M&A activity in the sector as of late, two factors -- the disparity of value between buyers and sellers, and general economic environment and regulatory uncertainty -- posed the biggest challenges for more deals.

"The low commodity price environment for oil, natural gas and wholesale power prices increased volatility and uncertainty of future earnings, causing a severe drop in equity valuations, and creating the gap between seller and buyer valuation expectations," said Tony Bohnert, KPMG's deal advisory partner for energy, natural resources and chemicals. "Companies, however, are looking for deliberate acquisitions that will strengthen their current market position and help them grow and expand, despite significant market drivers that recently shifted the industry's landscape."

Bohnert added that debt financing will also present a major roadblock to M&A activity in the energy sector. "The credit markets have pulled back significantly since the beginning of 2016 and most companies do not have available cash on their balance sheets nor want to use their equity at current valuations to finance an acquisition," he said.

Overall, when survey respondents from all sectors were asked to pick the top six industries that would see the most M&A activity in 2016, a majority (70%) picked the technology sector overall, followed by 60% for the pharmaceutical and biotechnology sector. The energy sector, which includes oil and gas, came in eighth place overall at 21%.

However, 47% of all survey respondents said the consolidation of core businesses and competition would drive M&A activity in the energy sector, while 43% said continuing low oil prices would be responsible for such deals. And when asked to identify the key challenges to deal-making in the energy sector, 47% of respondents said it was valuation disparity between buyers and sellers, while 42% said it was the general economic environment, or the ability for forecast future performance.

Recent M&A activity in the energy sector includes a proposed merger between Halliburton Co. and Baker Hughes Inc., and another between the Williams Companies Inc. and Energy Transfer Equity LP, although the Justice Department opposes the former and questions have been raised regarding the latter (see Daily GPIApril 6aApril 6b). BP Group and Royal Dutch Shell plc completed their mega-merger last February (see Daily GPIJan. 28). Meanwhile, other companies, like Diamondback Energy Inc. (see Shale Daily,Feb. 18), Occidental Petroleum Corp. (see Shale DailyFeb. 5) and Tesoso Logistics LP (see Shale DailyFeb. 4) have expressed interest in M&A opportunities.

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