Upstream shareholders wary of cash-based M&A

Cash-based M&A deals in the North American upstream sector have been receiving fewer positive reactions from the market in recent years. 

This is according to a new Evaluate Energy report, “Key factors driving share price reactions to North American oil and gas corporate mergers.” 

The report – available to download at this link – examines the common factors between corporate mergers that led to an immediate rise in the acquirer’s share price one day after being announced over the past 10 years.  

The data indicates that in the U.S. and Canadian upstream sectors, fewer than 40% of cash-based mergers resulted in a positive reaction to an acquirer’s share price a day after announcement.  

This represents a steady decline from 2014 and 2016, when over 60% of such deals saw a positive reaction. 

Stock-based deals, on the other hand, are increasingly receiving positive market reactions.   

“We believe this change in attitude is caused by changing cash spending patterns across the industry,” said Mark Young, report co-author, and Evaluate Energy Senior Oil and Gas Analyst.  

Evaluate Energy’s analysis of 88 public North American companies active in Q2 2024 shows that there has been a marked change in focus. Companies are increasingly using cash for shareholder returns through increased dividends and share buybacks. 

Capex made up a large portion of spending across North America before COVID-19.  

Following the onset of the pandemic in early 2020, capital spending levels fell dramatically and were replaced by a gradual but significant increase in shareholder returns.   

“Before COVID, around 50% to 70% of cash use was targeted at growth through capital expenditure,” said Young. “Now almost 70% of our group of 88 companies are paying dividends, and over half are buying back shares, compared to much lower figures in the past.”  

Using cash for shareholder returns, rather than on growth, is translating through to the investor reaction to cash-based M&A deals.   

“Our share price analysis suggests that investors are clearly happier right now if cash is available to continue today’s levels of dividend spending and buybacks, instead of spending on M&A,” said Young.  

Evaluate Energy’s report examines this developing trend in more detail and identifies several deals that did not follow suit. The report also looks at how purchase price metrics, deal location, oil price and debt concerns impacted shareholder reactions to North American upstream mergers over the past 10 years.  

The report can be downloaded at this link.