Tuesday, September 8, 2009

Where's the Consolidation?

It's become a business truism that business consolidation tends to occur in a recession when large, stable companies are able to bulk up through mergers or pick up bargains as more vulnerable companies become distressed.  This is especially true in the energy markets.  Some of the big mergers that created the super majors occurred during previous recessions.

With the crash of the stock prices, the wretched state of the financial markets and the plunging price of natural gas, people in the natural gas industry should be able to look up and see investment bankers circling like vultures.  So far, this hasn't happened. There have been a few failures of smaller companies, but nothing of note.  The recent acquisition of BJ Services by Baker Hughes has many thinking that the wave of consolidation is finally starting.  The Houston Chronicle had a good article to this effect last week.

The article suggests that the market might be close to a bottom, but it was written days before the latest round of bad news impacting the gas industry.  Nevertheless, the end of October will mark the end of the gas storage injection season and the beginning of withdrawals.  The storage issue will move closer to the proverbial back burner.  Prices likely won't spike, but the uncertainty about storage capacity and injection will end.  I've always believed that the market hates uncertainty more than actual bad news.  Market participants have the conceited belief that they can bad news can be valued and then "priced into a stock."  Uncertainty, however, cannot.

The potential for consolidation might be further exacerbated by the storage problem before we get through October.  If storage fills up and E&P companies are forced to curtail production, they are going to have a tough time making loan payments, and some of these companies have a lot of debt. It's going to be an interesting few months.

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