The era of giant acquisitions at big premiums is over for now. The oil giants are seeking smaller acquisitions at tighter premiums.
Oil M&A is back, but investors shouldn’t expect the deals to fill their 10-gallon cowboy hats with cash. The latest transactions are more modest than in past years, and the acquired companies are seeing much smaller premiums.
The most recent acquisition came this past Monday when Permian Resources agreed to buy Earthstone Energy for $4.5 billion, including debt. Permian is paying for the deal in stock at an 8% premium to the exchange ratio between its shares and Earthstone’s stock price over the previous 20 days. That’s not exactly a rich premium in historical terms. Exxon Mobil agreed to a 25% premium for XTO Energy in 2010. Big Fish, Little FishSmaller oil producers may prove to be prey for larger, more highly valued acquirers. Source: FactSet The lack of a big premium results from several factors. For one thing, oil companies are no longer focused on getting bigger at any cost. Instead, shareholders have been demanding that they focus on sending more cash back to shareholders. It’s also becoming more difficult for small and mid-cap oil producers to attract investor attention—and the kind of multiples that lead to rich premiums. Andrew Dittmar, an analyst at Enverus Intelligence Research, expects more acquisitions ahead, because several smaller producers would probably fit well into larger companies and help them expand their resource base. Among the operators he thinks could be bought are Callon Petroleum, Vital Energy, SM Energy, Matador Resources, and Permian Resources itself.Last WeekMarkets The yields of 10-year Treasuries hit a 16-year high as the debt selloff continued. S&P Global followed Moody’s by cutting ratings for a number of U.S. banks. And China made a minor cut in interest rates as Evergrande declared bankruptcy in the U.S. Hawkish comments from Jackson Hole stifled a Nvidia -led tech rally, and Fed Chair Powell reiterated policy: not done yet. It was a nervous, if positive, week, with the Dow Jones Industrial Average falling 0.45%, the S&P 500 up 0.82%, and the Nasdaq Composite gaining 2.26%. Companies Dick’s Sporting Goods fell 24% after an earnings miss, blaming it on retail theft. Macy’s beat but fell 1.6% on weak guidance. Lowe’s beat and share rose 2.4%, but it warned of consumer pullback. Monthly home sales fell to the lowest point this year. Nvidia revenue more than doubled, kicking off a rally. The stock ended the week up 6.39%. Deals U.K. regulators said they would consider a new proposal by Microsoft to provide cloud-streaming rights to Activision Blizzard games to Ubisoft …Softbank filed for an Arm IPO on the Nasdaq...Roark Capital finally agreed to buy Subway. The Wall Street Journal earlier reported a price of $9.6 billion… United States Steel rejected a union call to accept a takeover bid from Cleveland-Cliffs...A group that included Boaz Weinstein, William Ackman, and Mark Lasry bid for hedge fund Sculptor Capital, which had already agreed to sell itself to real estate investor Rithm Capital for $639 millionNext WeekTuesday, 8/29 Tech earnings continue with investors seeking signs of how enterprise computing is holding up and how cost-cutting is going. On the spot: Okta, Chewy, Nio, Hewlett Packard Enterprise, HPInc., and Box. S&P CoreLogic will release its Case-Shiller National Home Price Index. Economists polled by FactSet forecast that home prices in 20 U.S. metropolitan areas rose 1.1% in June from May but cooled down 1.3% compared with June 2022. Wednesday, 8/30 Salesforce will be the main event when it reports. The software and cloud giant has ridden the artificial-intelligence-fueled tech rally all year. Thursday, 8/31 Investors will get a look at results from Dollar General, Campbell Soup, and Ollie’s Bargain Outlet. These stocks should provide some perspective on how lower-income consumers are coping with inflation. Friday, 9/1 It’s a Jobs Friday, and a new month dawns. Economists polled by FactSet estimate that the U.S. added 172,500 jobs in August, a slowdown from 187,000 in July.
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