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Stock Strategist Industry Reports

Lower Prices, Greater Activity for Oil and Gas M&A in 2009

We see opportunities for those players able to purchase acreage at distressed prices.

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It is no secret that the marketplace for oil and gas properties has weakened considerably since this past summer. Less than a year ago, high E&P stock prices and access to cheap debt meant almost everyone was in the acquisition hunt at some level. Now the credit crisis, slumping stock prices, and lower oil and gas prices have narrowed the field of bidders and raised the specter of distressed sellers entering the market in greater numbers. We see a handful of factors driving the marketplace for oil and gas property prices in 2009. We also see some opportunities amidst the wreckage.

Lender Enthusiasm to Wane
As oil and gas prices marched higher, so did the pace of drilling and new discoveries. Higher prices and greater reserves bookings propelled lender enthusiasm in the E&P companies' favor. Borrowing bases for many of the E&P companies we cover continued to expand throughout autumn, even as oil and gas prices contracted. But, with oil and gas prices solidly lower and drilling activity significantly curtailed today, we think this trend faces strong head winds this spring. With reserves growth slowing and the bankers' price decks right-sizing, E&P companies could face shrinking borrowing bases as the year progresses. All else equal, this suggests more assets will need to be sold for liquidity purposes and less dry powder will be available for buyers.

Eric Chenoweth has a position in the following securities mentioned above: CVX, XOM, RRC, RDS.A. Find out about Morningstar’s editorial policies.