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There will be deals

10 December 2015 By Kevin Allison

Oil’s messy reckoning is inviting a U.S. mega-deal in 2016. Companies and governments are modifying capital strategies amid another lurch down in crude prices. If these conditions persist, something like Royal Dutch Shell’s takeover of BG, originally valued at $70 billion, should look ever more appealing. Occidental Petroleum and Anadarko are two companies that could make tempting targets.

A 17-month rout in oil has persisted, pushing oil below $40 a barrel in recent days. Chevron and ConocoPhillips both just said they would cut investment next year by roughly a quarter from this year’s already-reduced levels.

Pipeline operator Kinder Morgan, which is saddled with heavy debt, also this week slashed its dividend by 75 percent, saying it could no longer afford to make the full payout while continuing to invest in growth projects and hold on to its investment-grade rating after a 65 percent drop in the value of its shares since April. Meanwhile, Alaska’s governor may introduce the state’s first personal income tax in 35 years after the oil crash gouged a multibillion-dollar hole in the state budget.

In theory, such widespread upheaval should be creating opportunities for stronger oil producers to buy assets, or even entire companies, on the cheap. In fact, the industry has hunkered down. Data compiled by Thomson Reuters show $190 billion of U.S. oil and gas transactions announced through Dec. 9, down from $270 billion at the same time last year. Despite their fat balance sheets, the likes of Exxon Mobil and Chevron have yet to capitalize on the market disruption.

That could change next year as weaker shale producers get further squeezed, and expiring hedges and stretched balance sheets start to make valuations even more appealing. Anadarko shares already have tumbled by nearly half since April, valuing the U.S. explorer and producer at just $26 billion. Likewise, $52 billion rival Occidental’s attractive fields in the Middle East and its presence in the desirable Permian Basin in Texas could put it squarely into the sights of an ambitious acquirer.

Whatever the ultimate target, the latest ructions mean the day is getting closer for a Shell-sized oil deal to spill across the Atlantic.

This view is a Breakingviews prediction for 2016. Click here to see more predictions.

 

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