Energy haves circle have-nots

Published Mon, Feb 22 20161:22 PM EST

Breakingviews

Kevin Allison

The energy haves will be circling the have-nots in Houston this week. Balance sheets and the fate of the recently announced Saudi Arabia-Russia oil output deal will be on the agenda as industry executives gather for the annual IHS CERAWeek gabfest. A long-expected wave of dealmaking may finally emerge as weaker producers' financing dries up. When delegates last gathered in April 2015, crude was trading at around $60 a barrel and Royal Dutch Shell had just launched its $70 billion swoop on gas producer BG. A brief rally in crude prices proved fleeting, though, and an expected wave of follow-on deals never materialized. Instead, producers hunkered down as oil prices fell below $40 per barrel, some 70 percent below mid-2014 levels. Global oil and gas M & A activity dropped 11 percent during 2015 — overall a record year for deals, according to Thomson Reuters data. The average S & P 500 energy-sector stock has tumbled more than 40 percent since mid-2014. Session titles like "Energy Markets in Turmoil" and "Navigating the Storm" reflect the dark clouds over this year's proceedings. Conference-goers will be listening carefully to what OPEC Secretary General Abdullah al-Badri and Saudi Oil Minister Ali al-Naimi have to say about the prospects for an output cut following the agreement between Russia and Saudi Arabia to freeze production at January's levels. More from Breakingviews: U.S. to kick foreign banks while they're down Barring a big new announcement, a panel called "Financing the Energy Future" may be of more immediate relevance to weaker producers. A recent study by Deloitte found that some 175 listed oil exploration and production companies worldwide with a combined $150 billion of debt were at high risk of financial stress at current crude prices. More funding could evaporate this spring as banks review the value they assign to oil and gas reserves used as collateral for loans. Crude prices rose as much as 7 percent on Monday after the International Energy Agency predicted falling U.S. production would lead to a slow recovery starting next year. The weakest producers may not be able to hang on that long. But oil majors like the $350 billion Exxon Mobil still have formidable firepower, while some smaller drillers with decent balance sheets, including Hess , Pioneer Natural Resources and Devon Energy , have recently tapped equity markets in readiness for a prolonged slump. With hedges that protected many firms' 2015 cash flows rolling off, hardier producers may soon find themselves tempted out of the bunker to scoop up stressed rivals — or at least to cherry-pick their assets. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com Read More Top analyst: Buy this little-known internet stock

(2nd R-L) Russia's Energy Minister Alexander Novak, Qatar's Energy Minister Mohammad bin Saleh al-Sada, Saudi Arabia's Oil Minister Ali al-Naimi and Venezuela's Oil Minister Eulogio del Pino attend a joint news conference following their meeting in Doha, Qatar February 16, 2016.

Naseem Zeitoon | Reuters

When delegates last gathered in April 2015, crude was trading at around $60 a barrel and Royal Dutch Shell had just launched its $70 billion swoop on gas producer BG. A brief rally in crude prices proved fleeting, though, and an expected wave of follow-on deals never materialized.

Instead, producers hunkered down as oil prices fell below $40 per barrel, some 70 percent below mid-2014 levels. Global oil and gas M&A activity dropped 11 percent during 2015 — overall a record year for deals, according to Thomson Reuters data. The average energy-sector stock has tumbled more than 40 percent since mid-2014.