It is hard to say which analyst said it first, but amidst the March banking crisis, someone stated that we are not witnessing a bank “run,” we are seeing a bank “walk.”
Banks and other financial institutions such as brokerage firms spent a decade or more making a living from zero interest rate policy, which let them pay little, if any, interest on customer deposits while investing deposits in loans or other fixed-income investments earning perhaps 2% or 3%.
As interest rates on treasury bills moved from nil to as much as 5%, money sitting in FDIC-insured accounts earning the “nil” rate is slowly awakening to the fact that the game has changed. In some cases, investors are rolling money from demand deposit accounts to CDs; in other cases, “cash” moves to money market funds or direct to treasuries or other short-term bonds and notes.
As every customer deposit in a bank is a liability to the bank, such movements are problematic, particularly for regional and smaller banks that don’t offer diversification of products that could keep the money in-house.
Alas, traditional bank “runs” happen with the sudden realization that a bank has made investments in loans or bonds that are broke and can’t be repaid. The situation is a slow-motion reaction of depositors waking up to the fact that they can earn better risk-free returns in treasury bills and related products. They are not “running” to the bank to withdraw, they are “walking.”
What does all this have to do with the M&A market?
When banks are in trouble, credit is restricted. M&A deal-making is affected by credit conditions, even if credit for deals isn’t always provided from the banking channel.
Even before the banking situation arose, deal-making in the O&G world was muted. A recent KPMG report notes that in the first quarter of 2023, “Deal volumes and values for O&G and chemicals continued a year-long decline since the beginning of 2022. Demand for both O&G and chemicals remained resilient, and deal activity may increase later this year, but for now, deal makers maintain a wait-and-see attitude.”
Coming into 2023, sources of optimism for deal-making in the O&G space hinged on higher energy prices and the fact that private equity firms went into the year sitting on record levels of cash expected to be utilized.
Oil and natural gas prices have been soft relative to expectations, and PE deals have not been as robust as hoped.
Pitchbook reports, “U.S. PE deal-making delivered a mixed verdict, with deal count faltering by another 9.3% and deal value rising by 11.4% in Q1 2023. While we are well above the pre-COVID-19 averages of roughly 1,400 deals and $180 billion in deal value, the trend is still flat to down, and we have yet to make a definitive bottom.”
All is not bleak, there are arguments to be made for an uptick in energy M&A activity upstream.
A recent Bloomberg story said, “the U.S. energy patch is ripe for a takeover boom, as oil and gas producers flush with cash turn to deal-making to find new sites to drill.” The article notes that energy producers are “flush” with cash after price run-ups related to the Russia-Ukraine conflict and looking for opportunity, particularly in the Permian Basin of Texas.
In terms of global and natural gas prices and supply constraints in Europe, there is a widespread belief that Europe may have dodged a bullet this winter with mild temperatures and may see a markedly different scenario this winter.
Further, as discussed in earlier columns, PE funds still have cash to utilize, though it may be a “buyer’s” market.
Potential sellers may do well to remain patient. A phenomenon of economic slumps is pent-up demand. In tough times auto sales may slow, but cars ultimately need to be replaced. Thus, sales slumps are often followed by disproportionate surges when the economy rebounds.
Lost in the return to normalization from COVID-19, war in Europe, and a Federal Reserve Bank fighting generational inflation rates, is the idea that sometimes-biding time is a good choice.
