Oil & Gas M&A to ramp up in 2016

Oil & Gas M&A to ramp up in 2016
13:57 7 Yanvar 2016
39 Dünya
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Baku, Azerbaijan, Jan. 6

By Khalid Kazimov – Trend:

In contrast to 2015, upstream oil and gas deal activity is set to ramp up this year regardless of what happens to the oil price, according to Wood Mackenzie's M&A outlook for 2016.

"Should oil prices stay low, companies will be forced to sell assets and merge businesses: to free up capital, to cut costs and to 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 US$65 per barrel in Q4 – companies will move quickly to catch the next up-cycle and re-focus from survival to growth," Wood Mackenzie added.

The global energy, metals and mining research and consultancy group’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 US$82 billion takeover of BG, deal spend collapsed by two thirds; only fourteen deals higher than a billion-dollars in value were announced, compared with 46 in 2014.

Luke Parker, Corporate Analysis Research Director for Wood Mackenzie explains; “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,” Parker adds.

“Should the current pricing gloom persist, we expect that 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,” Mr Parker continues. “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 H1 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,” Mr Parker explains.

Greig Aitken, Principal Analyst – M&A for Wood Mackenzie, adds: “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 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 H2. This scenario would also prove a boon to M&A activity. "As we saw in Q2 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," Mr Aitken says.

In terms of likely buyers, Wood Mackenzie highlights the private equity sector as being well positioned for counter-cyclical opportunities. As Mr Parker explains: “Reports last year suggested that private equity had anywhere between US$40 billion and US$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-capitalised to take advantage."

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