‘Natural Pause’ in Activity for PE Energy M&A

Before moving to Houston in 2008, David Denechaud had done one energy-related deal in his law practice. Since then, he’s done one deal that wasn’t energy-related.

Denechaud recently joined the firm Sidley Austin LLP, and spoke to Privcap about what he’s seeing in his practice of private equity and oil and gas merger and acquisition transactions, and what’s ahead, as the PE sector watches oil prices drop.

Denechaud started his law career in New York, mostly representing private equity clients, and when he moved to Houston he

decided to continue his focus in that sector. “In 2008, there weren’t many attorneys [in Houston] devoting themselves to private equity. I was fairly quickly able to put together a neat practice in this town.”

He happened to be in the right place at the right time as the U.S. energy opportunity exploded, with Houston at its epicenter. The focus of his energy M&A practice has been in upstream, midstream, and services.

“Upstream and midstream in the past five years have been extremely, extremely busy,” Denechaud says.

The topic he’s asked most about today is oil prices, which have fallen sharply in the past week due to a decision by the Organization of the Petroleum Exporting Countries that it would not cut production in response to the drop in prices. This led to a fall in the price of benchmark oil prices, with analysts predicting that they could plunge farther at the start of 2015.

“In midstream, M&A will continue,” Denechaud says. “Infrastructure still needs to be built; pipeline returns will just be lower. I’ve spoken to upstream private equity clients in the last couple of months. Every time prices soften there’s a natural pause, where buyers don’t want to buy at higher prices, and sellers don’t want to sell at the lower price. It creates a natural slowdown, and that’s occurring now.”

Denechaud says he has a few exploration and production M&A deals moving forward, and the “natural pause” will continue for the foreseeable future. The increasing number of distressed companies could lead to opportunities for M&A, he says, and private capital sources will have investment opportunities as E&P operators contend with lower prices, and may need outside sources of funding.

One of his PE upstream clients was anticipating that the market for energy M&A would reset in January or February of 2015, but after the OPEC announcement, that timeline has disappeared.

The OPEC decision has made it more difficult to predict what M&A transactions will look like in the next six months and in 2015 as a whole, he says. But the number of midstream M&A transactions is still going to rise and the market will be busier, Denechaud says, and “private equity capital sources are expected to be busy.”

In upstream M&A, he thinks the discrepancy in prices between sellers and buyers will resolve itself, and in general, activity in the sector will pick up. He adds that “it’s hard to say when with the new variables in the mix.”