Colin Barr today wrote that Egypt could be a case study for peak export theory, under which oil prices would rise steadily until major importers like the U.S. plunge into recession.
If he’s correct, then we’re about to see a major decrease in U.S. energy sector M&A activity. Buyers will get scared off in an environment where crude barrel prices regularly top $100 (or more), particularly if they believe that a major reckoning is on the eventual horizon.
But we don’t need peak export theory to play out in order to see a decrease in energy M&A. Let’s just imagine that this month’s average crude price of $91 per barrel represents the new normal. Even at this level, we should expect a slowdown.
Many energy market investors believe that there is a crude price equilibrium at which both buyers and sellers feel comfortable (i.e., feel that neither one is getting screwed). As I wrote last October, that figure seems to fall between $75 and $85 per barrel. Less perfect, but passable, M&A market conditions would be between $60 and $90 per share. Anything outside of those limits, however, and all bets are off.
Need evidence? Just take a look at Q3 2010, when crude prices remained within the $75-$85 per barrel equilibrium. Capital IQ reports that the value of U.S. energy M&A in that quarter was the second-highest since 2006, with more than $56 billion worth of activity. Compare that to Q4, when prices spent all but one week above $85 per share. Dollar volume tumbled more than 38%.
It’s obviously possible that buyers and sellers could recalibrate their equilibrium math if prices were to remain steady at $90 to $100 per barrel for several months or a year. After all, deal makers are paid to make deals.
But that would take time, and it appears that activity already has slowed. Less than $1 billion of U.S. energy M&A transactions have closed so far in January, which is the smallest monthly number since 2006. The January figure rises significantly when announced deals are included — thanks to Alpha Natural Resources (ANR) agreeing to buy coal miner Massey Energy (MEE) for approximately $7 billion — but it still would be the lowest monthly figure in more than a year.
So we’ve already got a slowdown. The only question now is a matter of degrees. The higher crude prices go, the fewer deals will come.