Firesale In Energy Assets

Despite the obvious pain in the energy sector for the last 18 months, major asset sales have been few and far between in the sector. The problem has been a classic one in markets – sticky prices leading to a wide gap between supply and demand in assets.Oil companies looking to shed assets either to become more efficient or because of financial distress have been holding out for higher prices under the expectation that oil prices would bounce back soon, creating significant option value in underwater assets. Buyers like private equity firms have been considerably less sanguine though, and have essentially only been willing to pay fire sale prices for most assets.This gap in expectations has hindered asset sales from companies like Chesapeake, Quick Silver Resources, Swift Energy, Magnum Hunter, and others. Even in bankruptcy, many firms have found out that their assets are worth less than the debt on those properties. This has led to banks like JPMorgan and Citi holding the bag on assets that have values far less than what the banks had lent to the bankrupt firm. Those banks are motived sellers and will likely keep the market for energy assets depressed for at least a year. Of course for investors with a long-term time horizon like Blackstone or KKR, this could create a major opportunity. Yet private equity firms are being very disciplined with their capital and are only slowly starting to enter the market for such assets.2016 could be the year that this reticence on the part of buyers starts to ebb though, as sellers may be forced by bankruptcy conditions to relent and accept whatever price they can achieve. Wood Mackenzie recently put out a report suggesting that M&A activity in the oil patch will ramp significantly this year regardless of what happens to oil prices.

Source: Firesale In Energy Assets | OilPrice.com

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