2016 will see an escalation of M&A activity across all energy sectors especially in smaller, more strategic deals, according to KPMG LLP’s 2016 M&A Outlook Survey, while some sectors will see an increased likelihood of major mergers, as evidenced by recent activity in petrochemicals and regulated utilities.
Seventy-one percent of energy executives indicate plans to initiate two or more M&A transactions in 2016. Fifty-three percent of executives anticipate deals under $250 million, and 28 percent are considering deals between $250 million and $999 million. Further, executives ranked strategic fit and growth potential as more important factors than deal valuation when evaluating an acquisition target, indicating a focus on bringing higher quality assets to market.
Despite activity heating up, however, the valuation disparity between buyers and sellers, coupled with the general economic environment and regulatory uncertainty will present the greatest challenges to these deals.
“The low commodity price environment for oil, natural gas and wholesale power prices increased volatility and uncertainty of future earnings, causing a severe drop in equity valuations, and creating the gap between seller and buyer valuation expectations,” said Tony Bohnert, deal advisory partner for Energy, Natural Resources and Chemicals. “Companies, however, are looking for deliberate acquisitions that will strengthen their current market position and help them grow and expand, despite significant market drivers that recently shifted the industry’s landscape.”
Forty-nine percent of executives attribute the strong appetite for M&A to fortifying competitive positions in current markets, 34 percent say satisfying
shareholder pressure to accelerate growth, and 26 percent say expanding beyond current markets.
Amid a weak economy and an industry inundated by organic growth challenges, consolidation of core businesses and the persistence of low commodity prices are seen as the biggest factors driving M&A activity. Behind these drivers are the desire to enter new business lines and asset classes (47 percent), expand customer bases (36 percent), and enter into new markets and expand geographic reach (34 percent). However, executives indicate the uncertainty around future growth, availability of debt financing, and regulatory considerations will play a significant role in inhibiting deal activity in 2016.
“Despite the anticipated uptick in deal activity, the biggest inhibitor will be the availability of debt financing. The credit markets have pulled back significantly since the beginning of 2016 and most companies do not have available cash on their balance sheets nor want to use their equity at current valuations to finance an acquisition,” said Bohnert.
The survey points to the U.S. being the most attractive destination for M&A activity, with 87 percent planning to invest in the U.S. The U.S., Canada and China make up the top three investment markets.
About the 2016 M&A Outlook SurveyIn collaboration with the Fortune Knowledge Group, KPMG LLP surveyed 553 corporate leaders and M&A professionals in October 2015. KPMG's survey, "U.S. Executives on M&A: Full Speed Ahead in 2016," is available here (http://kpmginfo.com/ma-survey2016/indexdraft.html).
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 174,000 professionals, including more than 9,000 partners, in 155 countries.