Robust M&A activity expected for oil and gas companies cleaning up balance sheets

After a prolonged downturn dating from 2014, the global oil and gas industry is finally seeing better days. The brighter outlook brings with it the opportunity for surviving companies to cut down debt. One of the main strategies to get the job done is to raise cash by the divesting assets.

“It’s no secret that many upstream oil and gas companies still have lots of work to do to clean up their balance sheets,” said Jeffery Malonson, a partner in King & Spalding’s corporate practice group based in the firm’s Houston office. “Divesting non-core assets for cash could be a near term solution,” he said, adding that “there is no shortage of buyers in the market looking for opportunities to deploy capital.”

Credit research firm Moody’s agrees, noting in a recent report that “an active M&A market bodes well for the E&P sector, with asset sales improving liquidity or reducing debt for capital-intensive companies with high leverage.”

Malonson says deal activity will be driven by opportunities to buy high-quality assets at relatively low prices, with private equity firms being in an especially sweet spot to go on a shopping spree. “Compared to previous cycles, multiples are low. But you have to remember we’re coming off a previous cycle that saw $100 oil prices – so I’m not surprised,” he said.

A lot of private equity capital allocated to the energy sector has been sidelined for the last two years.  “If the parties begin to arrive in the same zip code on valuation, then I expect to see lots of private equity buyers in the market,” he noted. 

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