US Natural Resources and Utilities:
High Activity, Hard Currency and Technology
by Lance Kawaguchi, Managing Director, Global Sector Head, Global Banking Corporates, Global Liquidity and Cash Management, HSBC
In comparison with regions such as Europe, the Natural Resources and Utilities (NRU) sector in the US has been a hive of M&A activity. Outbound deals have been aided by a strong dollar, while apparently domestic activity has actually often also involved the acquisition of global assets outside the US. Another strong US M&A theme has been NRU companies acquiring upstream shale assets, which contributed to 45% of deals in the upstream segment in the second quarter of 2016. From a treasury perspective, these trends have had various challenging implications, including the need to manage new regions, types of business and currencies.
North America was the leading region for M&A across the NRU sector during H1 2016 . Seventy-two out of 136 upstream deals (representing 45% of total value) involved assets located in the US, with Canada in second place on 29 deals (worth 21% of total value). Midstream deals have also been dominated by the US and Canada, while nine of the 11 downstream deals in 2015 were in the US and the largest by value in Canada.
US NRU companies have also enjoyed the advantage of a strong dollar when making acquisitions outside the US. Since the downturn in oil and natural gas prices started more than two years ago, there is no shortage of distressed assets available for such acquisition. This is reflected in the statistic that there have been a number of NRU bankruptcy filings around the globe during 2016, with more expected to follow.
The US has also seen an appreciable amount of nominally domestic acquisition, where both parties are US-headquartered, but where the bulk of the assets actually being acquired are distributed globally. However, in view of the reduced appetite of some of the banks that have historically funded larger mergers, a more commonplace activity - especially among oilfield services companies - is smaller-scale consolidation, with companies cherry picking assets more for bolt-on acquisition. The intention is that this sort of acquisition will make the acquirer more competitive as the current down cycle shifts into growth.
US oilfield services companies have also been acquiring technology assets. This is a reflection of continuing low oil prices, which is driving a need to reduce the production costs for upstream assets that will otherwise be uncompetitive in comparison with some major Middle Eastern producers. Examples of these also include technology companies expert in areas such as video and geological analysis that can reduce exploration costs.
US NRU treasuries face broadly similar challenges to NRU treasuries elsewhere, but there are some unique points of emphasis. The strength of the US dollar is encouraging international acquisition in addition to the global assets acquired through domestic takeover mentioned earlier. As a result, there is an increasing likelihood that US NRU treasuries will have to deal with acquired assets in unfamiliar countries, plus contend with similarly unfamiliar currencies, business practices and regulation.
Dealing efficiently with this type of situation is considerably easier if the treasury can depend upon the support of a banking partner with a global network and commensurate experience and expertise. This can smooth the post-acquisition path considerably, particularly with regard to matters such as cash visibility, liquidity management and de-risking acquired bank relationships.