Energy M&A stalls as buyers see little they want

Energy industry deals declined in the first quarter from a year ago, as would-be acquirers remained locked out of capital markets and others saw little they wanted to buy, a new report shows.

Oil well pump jacks located in Almond Orchard located over the Monterey Shale in San Joaquin Valley.
Citizens of the Planet | Getty Images

The number of announced deals worth at least $50 million was unchanged from last year, but overall deal value slumped 19 percent, according to data compiled by PricewaterhouseCoopers. The 39 deals announced had a combined value of $28 billion, compared with $34.4 billion a year ago.

The gap between what strategic buyers are willing to pay and the price sellers will accept remains an obstacle to deal-making, said Doug Meier, PwC's oil and gas sector deals leader. The healthiest energy companies are focused on generating cash, reducing debt, and positioning their balance sheets to take advantage of an eventual oil price rebound.

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As such, drillers and other energy sector players are reluctant to make deals that will increase their debts or won't immediately contribute to the bottom line, PwC concluded.

"They're being very disciplined in what I'd call a risk-averse environment," Meier told CNBC.

"The market for sub-performing or poor-quality assets is really not there," he added.

Occidental Petroleum CEO Stephen Chazen echoed that sentiment in an interview on CNBC's "Squawk on the Street" earlier this month.

"The asset quality of most of the companies in trouble is poor. They have break-evens of maybe $80 oil. Nobody needs to buy $80-breakeven oil properties. They have lousy balance sheets," he said.

OXY CEO: Asset quality is everything
OXY CEO: Asset quality is everything

Since the potential for synergy and cost savings is so low in oil and gas mergers, executives face a tough sell when presenting acquisitions to their shareholders, he added.

"Asset quality is everything in this business. Everything. It's not a financial business first. It's a technical business," he said.

Investors are also having trouble finding assets at the right price. Private equity is continuing to commit capital to management teams, but much of that money hasn't been put to work, Meier said.

That's because private equity is at odds over valuations with some sellers, but also because a number of energy companies embroiled in bankruptcy have opted to settle with bond holders by swapping debt for equity, rather than selling off assets, Meier said.

Sixty-three North American oil and gas companies have filed for bankruptcy since the beginning of 2015, according to the latest count by law firm Haynes and Boone. Altogether, the filings involve $22.5 billion in secured and unsecured debt.