US Upstream Oil and Gas M&A to Surge in 2016 Following a 73% Plunge in 2015, per 1Derrick/Derrick Petroleum Services
2015 US Upstream O&G M&A activity at $27 billion; down from $101
billion in 2014
Over $30 billion of offers rejected globally by shareholders in 2015
Public and new PE-backed firms to participate in asset or corporate
purchases in 2016
Strategic focus of strong companies and specific vulnerabilities of
Oil and gas information and insight provider 1Derrick expects 2016
upstream merger and acquisition (M&A) activity to rebound from a record
low in 2015. This is based on detailed company and regional forecasts
which will be publicly available in February 2016. These forecasts are a
result of strategic and financial analysis of more than 60 US producers
as well as transaction trends and assets on the market in major US
regions and plays.
With the industry in crisis due to the steep decline and continued
volatility in oil prices, US transaction value fell in 2015 to just $27
billion from $101 billion in 2014. Globally, upstream transaction value
plunged to just $67 billion in 2015, excluding Shell’s $82 billion
agreement to acquire BG Group, from $187 billion in 2014. In 2015,
despite widely held expectations that financial stress would lead to
industry consolidation, the number of corporate transactions plummeted
to an eight year low as buyers and sellers were unable to agree on deal
The competitive landscape within the US upstream sector is evolving. In
addition to public companies jockeying for survival, numerous new
PE-backed upstream companies have been formed, including Independent
Resources Management backed by Warburg Pincus, Three Rivers Operating
Company backed by Riverstone Holdings, Rockcliff Energy backed by
Quantum Energy, TRP Energy backed by Trilantic Capital and multiple
companies in the EnCap Investments portfolio. Such PE-backed companies
will vie with public companies to drive up M&A activity in 2016.
2015 results show difficulties in negotiating oil and gas deals
As corporations cut costs, slashed capital investment, and tapped cash
reserves to counter plunging cash flows, global transaction value fell
to a record low $5 billion in the first quarter of 2015. The 2015
quarterly average of $17 billion (excluding Shell-BG) was the lowest in
the last decade. For many E&Ps, the focus shifted from growth to
survival, contributing to $137 billion in assets on the market in
December 2015. However, large deals were hard to complete, as only 106
transactions exceeded $100 million in 2015, down from 242 in 2014 and an
average of 207 for 2008–2014.
Despite widespread predictions that financial stress would lead to a
burst of corporate consolidation in 2015, the $25 billion in corporate
deals (excluding Shell-BG) was the lowest in the last eight years.
Continuing uncertainty about how low prices would go and the timing of
any recovery made it difficult for buyers and sellers to reach agreement
on price. 1Derrick’s data points to $30 billion in offers which were
rejected by shareholders, including Woodside’s $11.5 billion bid for Oil
Search, Scepter Partners $11.4 billion offer for Santos, and the $5.5
billion proposal by ALFA and Harbour Energy to acquire Pacific Rubiales.
Shell’s agreement to acquire BG Group, the largest upstream transaction
since the merger of Exxon and Mobil in 1998, was a dramatic exception to
this trend. The financial strength of both parties and the long term
strategic benefits of the transaction outweighed the concerns about
shorter term commodity prices and supply-demand balance.
Asset transaction value plummeted to $42 billion, the lowest since
post-recession 2009, from $117 billion in 2014.
North American shale plays were particularly hard hit; the total value
of shale transactions was just $29 billion, down from $71 billion in
2015. The largest US transactions were Noble Energy’s acquisition of
Rosetta Resources with assets in the Eagle Ford play and the Permian
basin, and WPX Energy’s acquisition of RKI Exploration for its Permian
assets. Canadian upstream transaction value fell from $28 billion to $12
billion, excluding Suncor’s $5 billion still to be settled bid for
Canadian Oil Sands.
Driven by the Shell-BG deal, which included assets in South/Central
America, Australia, Africa, and other areas, transactions outside North
America accounted for 71% of the total global value, up from 31% in
2014. The $24 billion in transactions other than the mega-merger
included big-ticket purchases by national oil companies such as
Sonangol, Emirates National Oil Company and ONGC. Chinese NOCs did not
make any significant acquisitions during the year.
Identification of 2016 Predators and Prey
Given the new industry paradigms, applying past transaction trends has
limited value. So 1Derrick combined fundamental M&A analysis with a new
“bottoms-up” approach based on company financial and strategic analysis,
new peer group comparative metrics, and new regional and play reviews.
Working with Oil and Gas Financial Analytics, LLC, 1Derrick will publish
profiles of more than 60 US oil and gas producers. This study will
identify predators and prey, quantifying the financial capability and
likely strategic focus of the strong companies and the specific
vulnerabilities of the weakest. New comparative metrics will rank the
likelihood of M&A activity within and between peer groups and between
major regions and plays.
Early findings from the study point to a significant increase in US
transaction value, driven in large part by corporate consolidation.
After concentrating on short-term responses to the steep plunge in oil
prices which commenced in the fourth quarter of 2014, the more
financially stable firms are now considering longer term strategic
moves, including the opportunity to acquire attractive assets from
distressed sellers. Also, the general consensus that no significant oil
price recovery is on the horizon could make it easier for buyers and
sellers to reach agreement on price.
1Derrick/Derrick Petroleum Services (www.1derrick.com),
is an independent oil and gas research firm with offices in Houston,
London, Singapore and Bangalore. For more information on 2015 upstream
M&A results or 1Derrick’s upcoming 2016 profiles and forecasts, please
contact Ajit Thomas at Ajit.Thomas@1Derrick.com
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