Oil & Gas M&A Reaches $33.4 Billion in 1Q 2014

The recent absence of major Chinese involvement and eroding profitability in the oil and gas industry has led to M&A reaching just $33.4B in 1Q 2014, Evaluate Energy reports.

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The recent absence of major Chinese involvement and eroding profitability in the oil and gas industry has led to M&A reaching just $33.4 billion in Q1 2014, 28% lower than the average quarterly M&A spend over the past three years. The lower M&A value is also mirrored in the deal count of 205 deals during the quarter (excluding licensing rounds) which is 27% lower than the average deal count by quarter since 2010.

Chinese Companies Uncharacteristically Quiet

Since the start of 2010, state-influenced Chinese companies have been responsible for $95 billion of company-to-company oil and gas deals at an average spend of $5 billion per quarter. In Q1 2014, these companies accounted for only $147 million of upstream deals. It is likely that this relatively low amount of activity is more to do with a timing issue, rather than a shift in strategy from China, especially with Chinese companies rumoured to be interested in acquiring large stakes in the LNG industries of Canada’s west coast and Cyprus during the quarter.

Lower Industry Profitability Feeds Through to Lower M&A Spend

The more significant factor in the relatively lower M&A total is likely to be the continued drop in profits for the upstream industry as a whole. At the time of publication, 200+ companies had reported their 2013 annual results. Using the Evaluate Energy database, it can be seen that the 2013 normalised profits are 25% lower than in 2011 and 16% than 2012. The underlying reason behind the erosion of profits is the escalation of operating and development costs in the oil and gas industry, which haven’t been reflected in the oil and gas price realisations. Therefore, profits and free cash flow have been squeezed and companies have been more tentative with their capex budgets.

M&A Deal Value and Count by Quarter and Company Type
Source: Evaluate Energy M&A Database