Time for mergers and acquisitions in the oil and gas industry in Europe
- Written by Laurentiu Rosoiu
2014 has brought for the global oil and gas industry a significant increase of operations on the mergers and acquisitions market and a sharp drop in oil prices. As the oil prices collapse was originally an element blocking the M&A market, it then turned into a stimulating factor for the restructuring of the industry. The problems the market is already facing will give new impetus to this process and will support the relaunch of the mergers and acquisitions market, even in Central and Eastern Europe where things have moved at a slower pace so far.
The drop in oil prices in the second half of last year (a fall of over 50% in just a few months, in terms of percentage and the second largest decrease in absolute values during the last 50 years) has made out of 2014 one of the most spectacular, but also the most complicated year for the oil and gas industry globally. The spectacular side is given primarily by the oil price developments. The implications of these price movements are at least as spectacular through the mutations produced to the geopolitical or to the military situation worldwide; for the actors in the industry the wide price movement is spectacular as well as extremely important because at the end of the restructuring and repositioning process the oil and gas industry has actually been pushed into, we could have an industry with a completely different face.
At least this is the conclusion we can reach if we look at what happened at the end of the twentieth century, when the fall in oil prices from USD 20 to about USD 10 per barrel during 1998 - 1999 (in percentage terms a drop of about 50%, similar in amplitude to the one seen last year) has led to the impressive reconfiguration of the industry through a series of mergers between some of the calibre players of the time; Exxon has merged with Mobil; BP has taken over Amoco and ARCO; the French group Total has joined Petrofina and Elf and Chevron has merged with Texaco.
YEAR OF EXTREMES
The oil and gas industry faced 2014 with an oil price stabilized at around USD 100 per barrel and numerous forecasts were indicating the growth of global demand for oil - especially for the emerging economies in Asia. These forecasts were elements that stimulated the activity of mergers and acquisitions in the field and have led to the signing of some of the largest transactions in the industry in the past year. But that is what happened in the first part of the year! The collapse in oil prices starting July has significantly reduced to stagnation almost, the business mergers and acquisitions (Mergers & Acquisition - M&A) in the second half worldwide.
According to the ‘Global Oil and Gas Transactions Review 2014’ report, conducted by the consultancy company Ernst & Young, most of the biggest transactions of the year were made in the first six months of 2014. During this period deals worth over USD 5 billion were concluded. During the second half, unlike the first half, a sole major transaction has been concluded between Halliburton and Baker Hughes. It is true however that its value exceeded by a large margin the summed values of the four transactions concluded in the first half, being the third largest transaction in the industry, worldwide, during the last decade: USD 38 billion.
Following the sudden change of the situation on the oil market, the industry has also joined a process of reconfiguration, passing in less than half a year from one extreme to another: thus, as in the first part of the year the industry’s positive outlooks were traded, in the second half of the year the companies have recalibrated their plans, by trading the prospects given by the new economic context characterized by volatility, unpredictability and a low price of oil.
The move from one extreme to another is illustrated by figures: so, if in the first half of the year, effervescence in the field seemed to be at its peak, the number of transactions reaching the maximum average level of the previous five years... it has significantly reduced in the second one, as in the last quarter of 2014 the number of transactions was by 40% lower than the fourth quarter of 2013 and by 55% lower than in the last quarter of 2012.
YEAR OF LARGE TRANSACTIONS
Nevertheless, the activity of the first half of the year was so intense that it counterpoised the blockage during the second half of the year. At least this is what one can deduct from the figures released by the Ernst & Young report, which shows that 2014 was practically the most prolific in the last half-decade in terms of the value of M&A deals in the industry. Thus, in 2014 the transactions amounted to about USD 443 billion dollars, 69% higher than the value in 2013, significantly higher than those in the previous years (see the chart ‘Evolution of M&A transactions in the oil and gas industry worldwide’). However, the average value of the deals in 2014 was USD 447 million, also significantly higher than the average for the past four years.
In parallel, however, the number of deals completed in 2014 was in decline for the third consecutive year. This observation may lead to the conclusion that 2014 was a year of major transactions. The figures on the number of large and very large deals reinforce this perspective: thus, out of the total transactions last year in the oil and gas industry globally, some 82 had values above USD 1 billion, four of which exceeded USD 10 billion. For comparison, in 2013 there were only 67 transactions with values of over USD 1 billion worldwide, only one being over USD 10 billion.
EUROPE, FACING DEADLOCK
If globally, given the above mentioned developments in the field of M&A, 2014 can be labelled as the year of large transactions, in Europe the mergers and acquisitions have almost reached a deadlock, the number and value of deals continued the downward trend confirmed during 2011 - 2013, at a somewhat accelerated pace, however. As one can see in the chart ‘Evolution of the M&A transactions in the oil and gas industry in Europe,’ the 146 transactions concluded last year totalled only about EUR 15 billion, a considerably lower activity in 2014 against 2013 when 243 transactions were completed, reaching a total value of over USD 18 billion.
It’s worth exploring deeper the situation in Europe; the first observation that emerges is that while Europe’s economy has a significant share in the global economy (the EU’s GDP represents more than 15% of the global GDP, about the same as that of the US’s and China’s) and the European oil and gas industry is a major component of the global industry in the field (BP, Royal Dutch, Total and Eni being among the global industrial giants)... last year’s statistics show that the European oil and gas industry is almost insignificant as compared to the overall global M&A transactions. Looking back at the last five years, one can see that the values of such transactions in Europe accounted for only about one tenth (with possible small deviations plus or minus!) of the total value of these deals worldwide. The lack of extensive operations in this area could be interpreted in several ways: on the one hand it could be the reflection of an industry more stable than in other parts of the world – which means, however, a relatively moderate adaptation capacity and adaptation speed; another interpretation might be that the small number of such transactions is the consequence of the specificity of European industry - specificity given by the lack of a wide range of companies, a diversity that in the US is made up of many players operating in the area of exploiting alternative deposits.
On the other hand, strictly related to the development of the market in 2014, one should take into account the fact that, beyond the elements that led to the M&A market blockage worldwide in the second half of the year (i.e. the impact of elements felt worldwide, such as the falling oil prices, the unpredictable business environment, the financial institutions’ reluctance to finance projects, etc.), the European M&A market has been further affected by a number of complications specific to the region. A good example of this regard is the Scottish referendum on independence that blocked the completion of business and the beginning of negotiations for others.
TOP TRANSACTIONS IN EUROPE
As regards the operations in Europe, as sub-domains, the most intense activity was recorded in the upstream area. After two years of decreases in a row, the value of the deals concluded in this sector (highlighted in light gray in the chart ‘Evolution of M&A transactions in the oil and gas industry in Europe’) increased to about USD 13 billion, by about USD 6 billion higher (almost double!) than in 2013, decisive in this development being the USD 7.1 billion transaction by which Letter One Group has taken over RWE Dea, a subsidiary of the German group RWE.
This transaction is also the second largest globally in this sector, in terms of value (see the table ‘Top 10 transactions in the upstream sector in 2014 worldwide’) and the only one in Europe in the standings covering the 10 most important business transactions by operations (upstream, midstream, downstream and offshore), standings usually dominated by the US companies. In the upstream area in Europe, important transactions (even if never included in the top ten worldwide!) were the takeover of Marathon Oil by Det Norske (USD 2.1 billion) and the takeover of Statoil operations in Norway by Wintershall Group (USD 1.3 billion).
In contrast, the midstream sector (section highlighted in dark gray in the chart ‘Evolution of M&A transactions in the oil and gas industry in Europe’) the activity was reduced in 2014 to near extinction; in 2013, the value of European deals in this sector recorded a record level of last years of USD 7.3 billion.
In Europe there were also very few M&A transactions in the downstream sector, where there was a different dynamic against the global one; thus the global M&A deals value achieved in 2014 on the downstream sector significantly exceeded the one recorded in 2013 (see the chart ‘Mergers and acquisitions worldwide, by sectors’); unlike the global trend, as can be seen from the chart ‘Evolution of M&A transactions in the oil and gas industry in Europe,’ the European downstream sector recorded only 15 transactions totalling USD 1.3 billion.
But Europe is well represented in the offshore exploitation sector, where several thousand companies operate, many of them experienced, having skills and seniority in achieving its complex operations of exploration, exploitation and/or service - such as those active in the North Sea. Thus, although it is not registered as a transaction in Europe, the takeover of Kentz by SNC Lavalin, a transaction worth USD 2.8 billion, is the largest European offshore deal, and one of the top 10 such global businesses (see the table ‘Top 10 offshore transactions in 2014 worldwide’).
MODEST ACTIVITY IN CEE
And if in terms of M&A one can hardly see operations carried out in Europe in the past year as compared to what happened globally (where things have moved much better, and the value of transactions increased despite the deadlock in the second half of the year) in Central and Eastern Europe (CEE) the activity on the M&A had an even poorer dynamic; mergers and acquisitions were not lacking, but the values were rather modest.
Thus, in May 2014, the Hungarian company MOL announced the takeover of Agip gas stations owned in Romania, Slovakia and Czech Republic from the Italian group Eni – the value of the transaction was not disclosed. The takeover was done gradually throughout the year, the taking over of operations in Romania ending in February 2015. In August 2014 the same Hungarian company announced the acquisition of 44 Lukoil gas stations in the Czech Republic, the value of the transaction was also kept secret; this operation took place in the process of Lukoil’s withdrawing from the CEE market, the Russians having sold 75 gas stations in Hungary, plus another 19 in Slovakia to the Hungarian company Norm Benzinku’t Kft.
At the end of September 2014, after a few months of negotiations, the Austrian company AMIC Energy Management took possession of 100% stake in Lukoil Ukraine – subsidiary of the Russian group Lukoil which had in Ukraine 240 gas stations and six oil deposits - in a transaction estimated on the market to EUR 300 million (representing only the value of the gas stations valued at about EUR 1.5 million each).
Shortly thereafter, at the end of October, the French company Total announced the sale of its Norwegian subsidiary Total E&P Norge AS to PGNiG SA International (subsidiary of the Polish group PGNiG) for USD 317 million. And in late December last year, the Czech authorities approved the takeover by Unipetrol of the 34% package of the share capital the Italian company ENI had with Ceska Rafinerska Group - which owns the two refineries in Czech Republic - for EUR 30 million.
2015, THE M&A YEAR FOR CEE?
These were some of the transactions concluded in CEE last year, revealing the companies’ interest in the region in terms of increasing profitability, efficiency and business development through the new acquisitions. Such process could escalate in 2015. At least this is the conclusion to be drawn if we look at some of the latest statements by the major players’ officials in the industry on this issue. “I would not say our appetite (for M&A) is larger than in the past, but we constantly work to develop our upstream infrastructure segment,” said, for example, Sławomir Jędrzejczyk, CFO of PKN Orlen, during a conference on financial results, which took place at the beginning of 2015, adding that PKN constantly seeks new opportunities for acquisitions.
PGNiG is also one of the companies that can speed up its procurement process in 2015, considering the fact that, at the end of last year, the Polish company announced that is looking for consultants for assets acquisitions or operations with values higher than USD 600 million (twice the aforementioned within which PGNiG took over Total E&P Norge AS, which was completed in 2014).
In the same category of information that may give an insight into the possible evolution of the M&A market in 2015, encompasses the news that the Hungarian company MOL would be interested in taking over Gulf Keystone Petroleum - an independent company registered in Bermuda, listed on the AIM segment of the London stock market and operating mainly the exploitation of fields in Iraq’s Kurdistan region. The news first surfaced in March 2014 and was brought back to public attention in February 2015 when Gulf Keystone announced that it has appointed Deutsche Bank and Perella Weinberg Partners as financial advisors in discussions carried out with several interested parties, on the edge of a possible takeover. It’s worth mentioning that among those carrying negotiations allegedly is also PKN Orlen, if we are to take into account informal statements made by the representatives of the Polish company, released by the Reuters news agency in 2014, saying that Gulf Keystone would fit very well in the PKN’s expansion plans.
MOL does not hesitate in its turn to constantly communicate its intentions to carry on further acquisitions; the most recent such statement made by a company official earlier this year, was occasioned by the release of the financial results for 2014. “We follow any possible downstream acquisition in the region... and hopefully we can make a new announcement by the end of this year,” said, in February 2015, Ferenc Horváth, Executive Vice President in charge of refining and marketing with MOL. The company’s plans aim the increase of fuel sales in the CEE region from 4.3 billion litres in 2014 to 5.4 billion litres in 2017, according to Horvath’s statements. Last but not least, this category of potential buyers of operations and/or assets in the CEE region in 2015 might be joined by the Romanian company Conpet Ploiesti, which has announced it wants to buy legal services in order to expand abroad; according to information leaked to the press, Conpet is interested in buying an oil terminal in the Republic of Moldova.
THE GLOBAL M&A MARKET SEEN IN PERSPECTIVE
The swift and extensive fall of oil prices, which effectively has blocked the mergers and acquisitions market globally in the second half of last year, have led also to the emergence of numerous opportunities, thus creating the conditions to reverse the M&A market in 2015. The players in the field, the companies, their managers, the specialists and industry analysts or the investors and the financing institutions seem to have already got used to this ‘new normality’, characterised by volatility, by a low price of oil (incurring high risks to achieve new lows), by an unprecedented low level of efficiency in terms of exploitation operations of alternative resources, by the immense pressure on profit margins at industry level... and, not least, also by an unprecedented level in modern history of financial reserves companies in the field ‘sit on’ actually, pending opportunities.
Therefore, the M&A market’s relaunch may not take place until the end of 2015, but the premises are real! A serious impetus in this regard will be given to companies in search of different formulas to ‘reset’ their activities, in order to adapt to the new economic environment. This ‘reset’ can occur either through internal restructuring, by recapitalization or by selling assets or through other forms to get liquidities for their own operations or, in extreme cases, by foreclosures. On the other hand, after such a start, the M&A process will be supported by the companies that have cash and which are interested in creating synergies leading to cost cuts, through the acquisition of operations at prices significantly lower than those registered less than a year ago. In conclusion, regardless of when it will start and how it will take place (through consolidations, internal reorganizations, transformations, executions or even bankruptcies) the restructuring will lead to the emergence of an oil and gas industry capable of operating on significantly lower profit margins than hitherto.
At the same time, given the specific oil production in the US, where alternative shale reserves play a major role, the markets will evolve in a context of high volatility. Short cycles of capital in the exploitation of alternative resources (i.e. ability to invest and divest quickly in a business in this area) will allow the US companies dealing with exploiting of shale deposits to respond quickly to price changes. They will thus take some of the power OPEC members had hitherto - namely, the ability to balance the market and the price by reducing or increasing oil production - and will compete with traditional manufacturers.
In such a context dominated by uncertainties, the players on the market will be forced to focus on creating financial and operational chains that would allow them to cross without problems any volatile periods; this will be another element that will stimulate the activity of mergers and acquisitions in coming period.