A new Wood Mackenzie report suggests that merger and acquisition activity in the upstream oil and gas sector will ramp up this year regardless of what happens to the oil price.
A new report from Wood Mackenzie suggests that merger and acquisition activity in the upstream oil and gas sector will ramp up this year regardless of what happens to the oil price.
The research firm's M&A Outlook for 2016, published Wednesday, stated that, should oil prices stay low, companies will be forced to sell assets and merge businesses in order to free up capital, cut costs and survive amid growing financial pressures.
However, assuming oil prices recover in 2016 – which Wood Mackenzie forecasts will happen later in the year, with Brent rising to over $65 per barrel in 4Q – companies will move quickly to catch the next up-cycle and re-focus from survival to growth.
Wood Mackenzie's analysis shows that 2015 was the slowest year for oil and gas M&A in over a decade. Average monthly deal count fell by over a third, compared with the preceding 24 months. Excluding Shell's exceptional $82-billion takeover of BG Group, deal spend collapsed by two thirds; only fourteen deals higher than a billion dollars in value were announced, compared with 46 in 2014.
Wood Mackenzie Corporate Analysis Research Director Luke Parker explained in a statement sent to Rigzone:
"Uncertainty over oil prices continued to drive a wedge between buyers and sellers, sustaining a slowdown in activity that began in October 2014. With long-term oil prices so fundamental to the success or failure of M&A, and costs still in the process of re-setting, most were reluctant to commit to company-changing deals.
"Whether oil prices move up, down or nowhere at all in 2016, pressure to act will build, on both buyers and sellers. Exactly how the M&A market recovers will depend on how oil prices move in 2016, and where people expect they will move to beyond that.
Wood Mackenzie expects that, should the current pricing gloom persist, deal flow will increase in 2016.
"The drivers behind deals, and the types of deals we see, will differ this year as potential sellers come under increasing financial pressure. Mounting distress will force more companies to market: balance sheets will become ever more stretched without asset sales to balance the books. Financing options will be more limited: debt and equity investors are unlikely to be as welcoming as they were in 1H 2015, when expectations were for a quick rebound in prices."
Wood Mackenzie also warns that the number of vulnerable players is likely to increase: "While the top tier of International Oil Companies (IOCs) can largely take action to ride out a further year of low prices, the next tier down may have fewer options. Deeper strategic action, including asset sales, will be needed," Parker explained.
Greig Aitken, Wood Mackenzie's principal analyst for Wood Mackenzie, added:
"Assuming oil prices stay low, we can expect more corporate consolidation and more deals focused on cost cutting and operational synergies. The ability to drive the pace of capital expenditure (CAPEX) spend will be critical to companies needing to protect financial strength. Expect swaps and acquisitions based on taking operatorship of assets. In some cases, controlling the pace of spend will not be sufficient; living within cash flow will be the priority for E&P companies and some capital intensive development assets will have to be sold, almost regardless of price."
Wood Mackenzie sees the oil market tightening next year, boosting prices in the second half. This scenario would also prove a boon to M&A activity.
"As we saw in 2Q 2015, when sentiment takes hold that oil prices are on the path to recovery, M&A activity can pick-up quickly. First mover advantage is key – securing deals before competition grows and inflation sets in. At the moment, companies are focused on survival, but this could quickly shift back to growth, in a higher oil price environment," Aitken said.
In terms of likely buyers, Wood Mackenzie highlights the private equity sector as being well positioned for counter-cyclical opportunities. Parker explained: "Reports last year suggested that private equity had anywhere between $40 billion and $100 billion of funds earmarked for investment in oil and gas. Much of the capital available to this group was raised specifically to take advantage of the opportunities that would arise in the low oil price environment. 2015 yielded fewer opportunities than anticipated. However 2016 should provide more and private equity is still well-capitalized to take advantage."
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