Increased oil & gas mergers and acquisitions in 2015
In its latest study, A.T. Kearney, a leading global management consulting firm, predicts a significant increase in mergers and acquisitions in the oil and gas sector for 2015, as a result of oil prices falling below USD 50 from Brent’s USD115 high late June. The intense pressure on prices challenges cash flows so oil companies of all sizes need to have a clear response to the situation – both near term but also longer term. Companies are expected to respond with mergers and acquisitions to reshape the competitive landscape to their advantage.
Mergers and acquisitions (M&A) in oil and gas (O&G) showed a strong recovery in 2014 after a slow 2013, and with recent oil price decreases and OPEC’s decision not to cut output, 2015 is set to witness even further M&A activity across the value chain. These strategic deals will be key to growing value and aiding companies to navigate market turbulence.
“Strategic approaches to M&A are critical to address the intense cost and cash-flow pressures experienced by Oil & Gas players. Our analysis and discussions with industry executives revealed the likely onset of a new wave of mergers and acquisitions across the value chain in the next six to 12 months,” said Richard Forrest, global lead Partner for the Energy Practice and co-author of the Oil & Gas M&A study, A.T. Kearney.
He added: “The window of opportunity may be shorter than expected and will be driven by oil price expectations. Those companies with strong cash flow and healthy balance sheets will be able to leverage opportunities, while others will need to define strategies just to survive.” All players in the industry can benefit from a strategic approach to mergers and acquisitions, including International Oil Companies (IOCs), National Oil Companies (NOCs), independent oil companies, service sector businesses and financial investors.
Alvin See, Principal and co-author of the Oil & Gas M&A study, A.T. Kearney commented: “We expect to see the largest M&A deal value as well as largest share of deals in the upstream segment, with significant value increases in the midstream and among oil service providers. Across sectors, the companies that best anticipate, and prepare to take advantage of, the fast-moving and volatile market will be in a much stronger position than their peers.”
For IOCs, optimizing portfolios will continue to be the focus. Divestment of downstream and non-core assets could accelerate to enable funding of targeted upstream activity and meeting cash flow needs throughout 2015. Mega deals for scale synergy are not out of the question but will be limited, if at all. The study determines IOCs will favour selective acquisitions to build in their chosen areas. M&A activity for NOCs will be aligned with the national agenda of their host government, which is often strongly influenced by near-term domestic needs and government agendas as much as by economic and business strategies.
The study finds that independent oil companies’ success in M&A will be determined by balance-sheet strength and varying levels of exposure to assets with higher breakeven oil prices. The more adventurous financial investors may take the opportunity to enter the market; however, the current margin squeeze, low oil prices, and sluggish demand could suppress some investors’ appetites. Financial investors are likely to acquire in the oil-field services sector, downstream divestments by IOCs, and for those with confidence, some upstream assets beyond the traditional mature production.
Oil service companies will continue to be hit hard as operator margins are squeezed and this will also impact service providers. There is significant potential for consolidation and investors with capital to invest will continue to be active, plus new entrants such as large engineering companies could make strategic moves to enter the market.
Richard Forrest concluded: “Businesses with the foresight to take first-mover advantage can make significant strategic gains in what will be a very dynamic competitive landscape.”