M&A at lowest level in a decade despite megadeals
Many in the oil and gas industry adopted a “wait and see” mentality following the crash in oil prices in November 2014, and mergers and acquisitions in the industry hit the lowest level seen in a decade as buyers and sellers both waited to see where prices would finally stop. A report from Deloitte found that upstream, oilfield services, midstream and downstream M&A in 2015 was below levels seen even during the Great Recession.
There were 379 M&A deals in 2015, down from 709 the year before, and from the 409 and 389 that respectively took place in 2008 and 2009 amid the Great Recession. Total deal value for the sector was also down to $286.23 billion in 2015 from $353.97 billion in 2014, despite several megadeals.
Royal Dutch Shell’s (ticker: RDSA, Shell.com) $82 billion acquisition of BG Group alone made up 77.6% of the top 10 upstream deals during the year. Even including the value of this megadeal, the overall value of M&A transactions for 2015 was also down 20% year-over-year, according to Deloitte.
The low levels of M&A appeared to stem from the wait and see attitude in the industry, writes Deloitte. “Potential sellers may have been able to stave off divestitures, and buyers did not appear willing to take on the risk of potentially overpaying in the event of a more prolonged downturn,” said the report.
Fewer than expected distressed assets came to market as well. Producers reacted quickly to the falling value of crude oil, cutting costs to shore up balance sheets, while also issuing second-lien debt, new equity and settling hedge contracts to offer an additional layer of production from the commodity price drop.
In the upstream sector, buyers appeared to be looking for already developed and producing assets, with very little appetite for development risk. This was especially detrimental to unconventional assets, said Deloitte, which tend to have heavily front-end loaded production.
Oilfield service M&A takes a dive
Both volume and total deal value for M&A activity in the oilfield service sector were down drastically year-over-year in 2015. The deal count fell to 36 from 120, a 70% decline, while total deal value fell by 64% to under $25 billion from $68 billion in 2014. Total deal value was down just 17% if the Halliburton (ticker: HAL, Halliburton.com) Baker Hughes (ticker: BHI, BakerHughes.com) deal, valued at $38 billion, is excluded from the 2014 total.
In 2015, the acquisition of Cameron by Schlumberger (ticker: SLB, SLB.com) accounted for 60% of the total deal value for all oilfield services sector M&A deals announced.
The commodity downturn hit the oilfield service sector even harder than the E&Ps because they had no ability to hedge. While this created plenty of opportunity for purchasing distressed assets, buyers seemed hesitant to execute, said Deloitte.
“Instead, the oilfield services sector primarily focused on restructuring, reducing capacity, and reviewing portfolio coverage, with the immediate emphasis on reducing capacity in manpower and equipment to adjust to the rapidly diminishing level of activity in the industry,” the report said.
Pressure in M&A builds as prices stay low
While the M&A market showed much less activity in 2015 than it had the year before, low commodity prices are going to continue to put pressure on companies, and will likely result in more M&A in 2016. Oil and gas companies may not be able to continue with the wait-and-see mentality, and the longer prices remain low, the more pressure for M&A in 2016 will build, according to research from Wood Mackenzie.
Only “an elite few” will be impervious to the strain caused by low prices, the group said. “While the top tier of IOCs can largely ride out a further year of low prices, the next tier down may have fewer alternatives,” than to look towards M&A to help balance the books.
The group expects that international majors will look towards assets that offer long-term strategic advantages, while smaller companies with solid balance sheets will be looking to come out of the downcycle ahead of their competitors. Private equity companies also remains poised for M&A, said Wood Mackenzie.
David Preng, founder and president of Preng & Associates, told Oil & Gas 360® that the money sitting in private equity war chests was one of the biggest differences between today’s downcycle and the crash in 1986. “Today there is $80+ billion in unlevered cash sitting in private equity’s coffers looking to be invested,” said Preng.
A sustained recovery in oil prices is likely to kick off higher levels in M&A this year, said Wood Mackenzie, which expects oil prices to recover to $65 per barrel in Q4’16. “First mover advantage is key,” said the report. “Securing deals before competition grows and inflation sets in,” will prompt companies to pick up assets as they see the price of oil improving.
Oil price volatility remains a serious obstacle to deals, however. Prices will need to settle in order for the bid-ask spread to narrow, and any sharp directional changes in price could quickly derail deals, said Wood Mackenzie.
Oil & Gas 360® asked the C-suite about M&A
In a recent poll conducted by Oil & Gas 360®, we asked E&P and oilfield service senior executives their outlook on M&A. When asked what they planned to do if prices remained in the $30 per barrel range, 44% of respondents said they planned to buy assets, while about 30% said they would neither buy nor sell, suggesting that some are continuing in a holding pattern while many are beginning to think about strategic acquisitions.
While certainly not in the megadeal class, most of the respondents said that they would be looking at larger deals in the next 12-18 months, with more than 40% saying they expected M&A deals to range in value from $100-$500 million, with 62% of respondents saying they expected M&A activity to be most heavily concentrated in the oilfield service sector.
The executives polled were more widely split in determining a price where M&A might kick off, however. The respondents were split evenly among four ranges where M&A acceleration might begin: $40-$50, $50-$60, $60-$70, or $70-$80.
Even if prices remain low, many will be forced into action in order to shore up their balance sheets. There is likely to be competition for the best assets, said Wood Mackenzie, while buyers will be able to dictate the price on less desirable assets.
