Oil M&A in a Changing Landscape

Oil mergers and acquisitions (M&A) are making a comeback, but investors will need to adjust their expectations. The recent deals in the industry have been more modest compared to previous years, and the premiums being offered to acquired companies have been smaller as well.

In the most recent acquisition, Permian Resources agreed to acquire Earthstone Energy for $4.5 billion, including debt. However, Permian is paying for the deal in stock at only an 8% premium to the exchange ratio between its own shares and Earthstone's stock price over the previous 20 days.

This premium falls far short of the larger premiums seen in historical M&A deals. For example, in 2010, Exxon Mobil paid a 25% premium for XTO Energy.

The reason behind the lack of substantial premiums is multifaceted. Oil companies are no longer solely focused on growing their size at any cost. Shareholders are now demanding that these companies prioritize returning more cash to them.

Furthermore, smaller and mid-cap oil producers are finding it increasingly challenging to attract investor attention and secure high multiples that could result in significant premiums.

However, industry experts like Andrew Dittmar, an analyst at Enverus Intelligence Research, anticipate more acquisitions on the horizon. He believes that several smaller producers would complement larger companies well and assist in expanding their resource base.

Some of the potential acquisition targets include Callon Petroleum, Vital Energy, SM Energy, Matador Resources, and even Permian Resources itself.

Oil M&A may not be as lucrative as it once was, but the industry is still undergoing transformations. The focus is shifting towards shareholder returns and strategic resource expansion.

Last Week in the Markets

While oil M&A has been making headlines, let's take a quick look at what happened in the broader financial markets last week:

Yields of 10-Year Treasuries Hit 16-Year High

The ongoing debt selloff led to the yields of 10-year Treasuries reaching a 16-year high. This development has grabbed investors' attention and could have implications for various sectors.

Rating Cuts for U.S. Banks

Following Moody's lead, S&P Global also downgraded the ratings of several U.S. banks. This news has raised concerns about the stability and performance of the banking sector.

Interest Rate Cut in China, Evergrande's Bankruptcy

China made a minor interest rate cut as Evergrande, a major Chinese property developer, declared bankruptcy in the U.S. These events have reverberated across the global financial landscape.

Tech Rally Falters on Hawkish Comments

A rally led by tech giant Nvidia was stifled by hawkish comments from the Jackson Hole symposium. Federal Reserve Chair Powell reiterated the central bank's policy stance, indicating that it is not yet finished implementing its plans.

Overall, it was a nervous yet somewhat positive week for the markets. The Dow Jones Industrial Average experienced a slight decline of 0.45%, while the S&P 500 saw a modest increase of 0.82%. The Nasdaq Composite outperformed, gaining 2.26%.

This Week in the Market

Last week, Dick's Sporting Goods experienced a 24% drop in earnings due to retail theft, while Macy's beat expectations but saw a 1.6% decrease in share value due to weak guidance. On the other hand, Lowe's exceeded expectations and saw a 2.4% increase in share value, but warned of a potential consumer pullback. Additionally, monthly home sales reached their lowest point this year. However, Nvidia's revenue more than doubled, resulting in a rally and a 6.39% increase in the stock by the end of the week.

Deals

Some noteworthy deals this week include UK regulators considering Microsoft's proposal to provide cloud-streaming rights for Activision Blizzard games to Ubisoft. Softbank has filed for an Arm IPO on the Nasdaq. Roark Capital has finally agreed to acquire Subway for a reported price of $9.6 billion. United States Steel has rejected a union call to accept a takeover bid from Cleveland-Cliffs. Furthermore, a group consisting of Boaz Weinstein, William Ackman, and Mark Lasry has made a bid for hedge fund Sculptor Capital, which had already agreed to sell itself to real estate investor Rithm Capital for $639 million.

Next Week

Tuesday, 8/29

On Tuesday, the focus will be on tech earnings. Investors will be observing how enterprise computing is faring and how cost-cutting measures are being implemented. Some notable companies reporting earnings include Okta, Chewy, Nio, Hewlett Packard Enterprise, HPInc., and Box.

S&P CoreLogic will also release its Case-Shiller National Home Price Index. Economists predict that home prices in 20 U.S. metropolitan areas rose 1.1% in June compared to May, but cooled down by 1.3% compared to June 2022.

Wednesday, 8/30

Salesforce will take the spotlight when it reports. The software and cloud giant has benefited from the ongoing tech rally driven by artificial intelligence throughout the year.

Thursday, 8/31

Investors will be interested in the results from Dollar General, Campbell Soup, and Ollie's Bargain Outlet. These stocks will provide insight into how lower-income consumers are coping with inflation.

Friday, 9/1

It's a Jobs Friday and a new month begins. Economists estimate that the U.S. added 172,500 jobs in August, which is a slowdown from the 187,000 jobs added in July.