Energy merger and acquisition (M&A) activity in the United States and abroad could face a slowdown in the near term due to the economic and political uncertainty following the Sept. 11 terrorist strikes, according to a report by the Global Energy and Utilities group at PricewaterhouseCoopers.

“The energy industry [continues to face] enormous pressure to lower costs, increase inefficiencies and increase shareholder returns. But, at the same time, the industry is inevitably sensitive to larger geopolitical issues,” said Robert Roberge, a partner in the group’s transaction services team. “In order for [M&A] deals to happen, we need some stability. Right now, stock prices and commodity prices are extremely volatile, which makes pricing hard to do, especially in stock-for-stock deals.”

In the end, Roberge believes the current unstable political climate may have the greatest impact on M&A activity in the immediate future. In “the current environment, it is…clear that the economics of the marketplace may not be as powerful, in the short term, as competing political forces. Any additional terrorist acts in the near future will add to the uncertainty and ultimately, increase volatility — which stifles M&A activity.”

He cautioned energy companies that are contemplating M&As to consider three key factors. First, the commodity price outlook remains uncertain. While OPEC has committed itself to a $22-$25/barrel price at current production levels, Roberge said “all bets are off” if the conflict in Afghanistan spreads to other areas of the Middle East and threatens supply. Oil, he noted, is a “huge wildcard.”

“Companies are keeping a very close eye on natural gas prices,” Roberge told NGI, because “many past merger and acquisition deals were based on $4 gas.” But with storage levels bulging, “it appears [that] any forecast north of $3/Mcf would require a very cold winter,” he noted. “If I was an company now, I would be looking at the conservative side” for gas and oil prices.

Secondly, Roberge pointed out that strong energy companies are getting stronger, while weak ones are getting weaker. “Top-tier companies with cash in place have room to do to deals even in this difficult environment, and they will continue to look at the top second-tier companies that lack critical mass to do business globally at all levels.” Meanwhile, he said “the bottom tier of the oil and gas industry is being hurt badly by volatility in commodity prices, limiting access to capital and making them possible acquisition targets for top-tier companies.”

Thirdly, Roberge said the easy energy M&A deals have been done already, which leaves interested suitors to face the stickier transactions. “With most of the major energy companies in Canada and the [United Kingdom] already acquired, the most promising opportunities for U.S. companies in the future may well be state-owned companies in Africa, South America, Russia and the Middle East. But those transactions have longer lead times and are inherently more difficult to complete.”

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