Reshuffling the deck as prices raise the stakes

Author Konstantin Rozhnov

Oil and gas company merger and acquisition (M&A) activity will gather pace in the coming months, with US shale assets among the most tempting targets, as expectations of a more prolonged period of lower oil prices, and recent falls in company shares, narrow the valuation gap between potential sellers and buyers.

Oil and gas company merger and acquisition (M&A) activity will gather pace in the coming months, with US shale assets among the most tempting targets, as expectations of a more prolonged period of lower oil prices, and recent falls in company shares, narrow the valuation gap between potential sellers and buyers.

“Motivated sellers include those entities that are running out of financial capacity as prices stay low, hedges unwind and debt comes up for refinancing,” financial services firm Ernst and Young’s global oil and gas transactions leader, Andy Brogan, said. “Expect the population of these to grow as the year continues.”

US benchmark WTI will probably be in the $50-55/bl range by the middle of next year, according to Australian bank Macquarie Capital global oil and gas strategist Vikas Dwivedi. “The big guys at the very high end of the market cap...  will not be [at] any real risk, but it will hit a much bigger group of companies if it continues,” he said.

From smaller independents to the majors, companies have had little choice this year but to focus on adjusting to life in the lower oil price environment through cutting costs, deferring future projects and reducing exploration activity.

But many — from UK independent Premier Oil to BP and Shell — are also eyeing potential acquisition opportunities, while contemplating further non-core asset disposals. Danish firm Maersk Oil says growing reserves and production through acquisitions could be a better option in the current environment than spending on exploration.

In the oil field services business — where the lower oil price impact hits faster and harder than in the exploration and production (EP) sector — Schlumberger, the leading company, last week moved to acquire rival Cameron for $14.8bn.

And Halliburton, the sector’s second-largest firm sector, last year announced plans to take over third-largest entity Baker Hughes for $34.6bn.

But expectations that Shell’s April decision to buy UK-based BG for £47bn ($72bn) would open the M&A floodgates in the EP sector have failed to materialise — so far. When oil prices halved to around $50/bl at the beginning of this year, compared with the middle of 2014, many firms saw it as a temporary correction.

“Now, I think that  it is settling in that this is not going to be a quick recovery, and accordingly there could be more motivation to do things than there was before,” US energy investment bank Simmons managing director for institutional research Pearce Hammond said.

“Certainly, staying in a lower price environment is going to encourage buyers and sellers to find closure,” ExxonMobil vice-president of investor relations Jeff Woodbury. The company always “keeps alert” to acquisition opportunities, he said.

Most companies point out that they are prioritising value over volume in the current environment, unlike at the turn of the century during the wave of mega-mergers. They mostly have their eyes on specific assets and smaller firms, rather than bigger companies.

“The landscape is quite uncertain in the industry and it will be for some time, and that will throw up all kinds of challenges and opportunities for companies that are well positioned for it,” BP chief executive Bob Dudley said.

M&A activity will accelerate as the year continues, according to Brogan. “Companies have to use it as one means to respond to the way the market is transforming itself,” he said.

For more information, please contact OilBlog@argusmedia.com

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