Featured # Markets | 3 years ago

Signs Pointing to Final Phase of Oil Cycle

According to the nation’s top oil analysts, more consolidation in oilfield services is likely and inevitable given the “lower for longer”. M&A activity has already played an important role on their part, the Baker Hughes (BHI) – Haliburton (HAL) deal unwinding nevertheless. Siemens obtained in 2014 Dresser-Rand for $7.6 billion, Schlumberger (SLB) obtained Cameron in 2014 for $14.8 billion and FMC Corp (FMC) obtained Technip at the start of the year.

Fadel Gheit, Oppenheimer analyst, belives there is an active consolidation environment in the later half of 2016.“Consolidation is always the last phase of the oil price cycle as companies revise their business model to survive in a lower for longer oil price environment,” Gheit stated. Although oil prices have doubled their lows since the start of this year, many analysts believe the industry is going to see “lower-for-longer” levels. “Oil producers are adjusting their capital spending budgets to cope with the new realities for a new ‘normal oil price’ of around $65 per barrel level,” Gheit further elaborated. Gheit also mentioned that “significantly higher or lower prices likely to trigger market response and the price becomes self-correcting.” Therefore, oil service stocks lead other energy industry groups in consolidation. “We think the rest will follow,” Gheit later added.

Names ripe for consolidation in the oil services that have been talked about among a number of analysts include Seadrill (SDRL), National Oilwell Varco (NOV), Weatherford (WFT), Oceaneering International (OII), Diamond Offshore Drilling (DO), Patterson-UTI (PTEN), Nabors Industries (NBR) and Rowan (RDC). As a result, Hedge Fund managers are now becoming involved as well. For example, Bruce Berkowitz of Fairholme has had an active voice for the merging of Now Inc (DNOW) and MRC Global (MRC). Gheit added that there are five phases of the long oil cycle—(1) Shock, (2) Denial, (3) Panic, (4) Capitulation, (5) Consolidation—and we are nearing the final stages. We are at the end of capitulation and the beginning of consolidation,” Gheit said.

“It is still a buyer’s market with modest takeover premium. As oil prices stabilize close to the new normal, the bid-ask gap will narrow, and consolidation will accelerate,” Gheit mentioned. “Surviving companies will be more resilient to low oil prices.”

The energy sector is financially locked and issuing stock, or using treasury share are the only remaining options, Gheit concluded with.

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