Effram Kaplan | Brown Gibbons Lang & Company
The broader capital markets are healthy, evidenced by intense investor demand. We continue to observe a strong desire to deploy capital and consummate acquisitions, driven by the availability of inexpensive financing options and surplus of capital—market conditions often compared to the last peak M&A cycle in 2007. A driving force in valuations, which was absent from the last cycle, is a persistent supply shortage of quality opportunities to deploy capital. Investors have considerable buying power and are responding in kind using acquisitions to accelerate growth. It’s a hungry market.
The credit markets remain aggressive, with buyers continuing to secure favorable credit terms in a borrower-friendly market as capital providers compete for financing opportunities. Leverage appetite is healthy for companies with attractive credit profiles, and higher leverage levels are accommodating purchase price multiple expansion.
Private equity funds have massive stores of capital waiting to be deployed. The growing capital overhang is fueling a supply/demand imbalance in the market, leaving funds to aggressively compete with each other for limited quality deal opportunities. Ample liquidity is expected to help support M&A activity with investors likely to maintain an aggressive posture in 2016 and into 2017.
The capital markets have started to open up to the oil and gas sector after a historically long period of major challenges. Relatively recent stabilized oil and gas pricing is contributing to improved investor sentiment with early signs that the market may be ridding itself of the “falling knife” cliché:
- After rebounding from a 12-year low this January, oil prices appear to be stabilizing in a $45/bbl – $50/bbl range. The 2016 rise in oil prices has contributed to an uptick in business activity within our own clients and across the broader market, thus leading to improved investor sentiment towards the sector.
- Operators have expressed an increased willingness to access the capital markets with reasonable expectations. As a result, the gap between buyers and sellers is becoming more aligned as it relates to value, capital structure, and form of transaction to actuate deals.
- Capital providers, while cautious given uncertainty in the market recovery and duration of this “stabilization”, understand that for many companies, negatively trending operating results are attributable to a depressed commodity environment and not internal operating issues.
- Capital flow into the sector is improving, evidenced by steady investment demand in the midstream and downstream segments and soft interest in upstream opportunities. While traditional lending institutions continue to display a reduced risk appetite in the sector, alternative capital providers are increasing their level of participation and offering creative, flexible capital solutions.
- Oil and gas continues to attract private equity interest, and fund raising is active. Existing platforms with healthy balance sheets have continued to expand via acquisitions. Private equity sponsors invested more than $3.7 billion in 25 oil and gas companies in June alone. Also in the month, fund raising topped $400 million—a continuation of solid activity with $12 billion raised in May. The sector also saw its first IPO filing since 2014. Private equity is looking to capitalize on today’s low-oil-price environment and provide financial solutions across the sector, with the midstream and downstream segments expected to be more active in the coming quarters.