1 Nov - Commercial Awareness - Energy
Topic: Goldman and Morgan Stanley Backed Megadeals in the Oil Sector
[URL unfurl="true"]https://www.ft.com/content/14d031a4-10c3-4768-bc1f-f99d9db88ea6[/URL]
The two mega M&A deals – Chevron-Hess and Exxon-Pioneer – brought $260bn to the two banks, each working on energy deals worth about $165bn.
Analysts foresee that there will be more bulk-up between major oil producers to produce cheap barrels in bulk. Therefore, more M&A activities in the oil sector. Goldman and MS will benefit from the deal-making as both have built energy expertise over the past decade.
Investors have pressurised companies to withdraw from organic growth, which is to drill new wells. Instead, they insisted on returning cash, so it has left companies with acquisitions as their very few options. Also, when oil prices soared during the Russian-Ukraine war, energy groups were able to pay back their debt.
The high valuations also made it easy for Chevron and Exxon to strike an all-stock transaction. If they use cash, the share price of oil companies may go down dramatically. But if they use stocks, everybody is affected equally.
Regulatory intervention is also unlikely because Washington is occupied with 2024 presidential election. The White House wil not want to be accused for causing oil price to rise for interfering.
Other banks are also involved in oil deals: Citi advised Exxon on $102bn worth of energy deals this year, including the $5bn acquisition of oil company Denbury in 2023. JPM advised on $89bn worth of transactions in 2023. Other boutique investment banks include Centerview Partner, Evercore
Interview questions:
What is an all-stock acquisition?
When the Buyer offers the Seller (company’s shareholders) a premium over the target company’s share price. This way, the Seller may earn a capital gain if the target becomes a much-improved company after the acquisition. As opposed to all-cash deals where Buyer assumed all the risks of the acquisition, all-stock is dilutes the risk to the target’s shareholders too.
