Gas Industry M&As Rise as Price Falls
Low natural gas prices seems to lead to more merger and acquisitions activity and vice versa.
The graph charts gas prices versus M&A activity from 2008 to 2011. The shaded bars are the value of mergers and acquisition in billions of dollars, with the numbers on the left. Gas prices are calibrated on the right and are represented by the blue line. The scales have nothing to do with each other but are matched up to show the inverse pattern.
When gas prices were still extremely high in 2008, there was only $15 billion worth of merger activity. As gas prices have fallen toward $3.50 per thousand cubic feet (mcf), merger activity has jumped toward $50 billion. But a brief rise to $4.48 per mcf in 2010 pushed activity down to $39 billion.
The likely reason is that low gas prices hurt profitability and leave gas companies vulnerable to takeovers. The classic example has been Chesapeake Energy, which was hugely overextended under CEO Aubrey McClendon and has since had to divest almost half its assets in order to cover debt. Even so, the company remains vulnerable to a takeover.
Mergers and acquisitions are not a bad thing. They are usually stimulated by a healthy economy and often lead to greater efficiencies. But they can also be the result of a particularly bad time in a specific industry. Although natural gas find are bringing prosperity to many parts of he economy, the gas glut has played havoc with companies that are in the gas industry.