'Shotgun weddings' in energy to boost M&A in 2016
Dealmaking in 2016 could surpass this year's record-breaking levels as acquisitions of distressed assets and companies accelerate, particularly in the energy sector, Robert Profusek, partner and chair of the global mergers and acquisitions practice at international law firm Jones Day, said Thursday.
Annual global mergers and acquisitions volume surpassed $5 trillion for the first time ever, data released by Dealogic earlier this week showed.
That volume was driven by big, transformational deals across industries, Profusek said. While that trend will continue to some degree next year, non-investment-grade dealmaking will pick up significantly, he added.
"Next year we're going to add to it a lot of distressed M&A, a lot of shotgun weddings, a lot of merge-to-survive kinds of things, and particularly, but not limited to, the oil patch," he told CNBC's "Squawk Box."
Dealmaking in the energy sector slowed to a trickle in 2015 as financial markets remained wide open to struggling drillers at the start of the year, helping them to weather a downturn that has cut the price of oil by two-thirds.
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At the same time potential sellers have been reluctant to offload assets at fire sale prices in the hopes that prices will recover. But despite a few brief periods of reprieve, the rout has only accelerated, threatening to plunge U.S. crude below $30 a barrel.
In this environment, many speculators have piled into energy debt markets, taking a "loan-to-own" approach as crude prices fell into the $50 range, Profusek noted.
"Well, that's really happening now that prices are kind of stuck in the mid-$30s, and you've got Goldman and others saying, well, they could go to the $20s," he said. "We'll see. One of the things about particularly the oil market, is it's really pretty hard to predict."
Profusek believes energy M&A will be driven both by strategic purchases by oil majors and efforts by private equity firms to restructure ailing drillers. He noted that in today's low-yield environment, there are "oceans of capital" looking for investments, primarily in nontraditional corners of the market that include hedge funds.
While $30 oil is flashing a buy signal, the market is still working through billions of dollars plowed into U.S. shale oil frackers, he said. "Before we get to that, there is a lot that needs to come out of the system. There is $100 billion of high-yield debt that was raised in the last five years for frackers."
But shares of some publicly traded drillers that look highly overleveraged today could double as oil rallies into the $50 range by the third and fourth quarter, Eric Nuttall, portfolio manager at Sprott Asset Management, told CNBC's "Squawk on the Street" on Thursday.
That outcome depends on Nuttall's thesis becoming reality. He sees an oil market currently oversupplied by roughly 1.5 million barrels swinging to undersupply as the U.S. and other non-OPEC production falls off significantly in the face of spiraling capital spending.
He noted that capital expenditures across the industry are down about $200 billion in 2015, and said they could fall another 20 to 30 percent next year. Without new spending, drillers will presumably be unable to maintain current crude output.
The question is whether that shortfall will offset OPEC production of roughly 31.5 million barrels per day, growing Saudi and Iraqi production, and the return of Iran to oil markets once sanctions are lifted.
Nuttall believes U.S. and non-OPEC production declines will leave oil markets wanting for roughly 500,000 bpd next year.