Baker McKenzie/Oxford Economics report expects a short global energy M&A turnaround that peaks in 2018

More oil price stability and significant internal restructuring of the sector are the key drivers leading a recovery in energy M&A with a peak in 2018, according to a new forecast by Baker McKenzie.

The firm’s Global Transactions Report, in association with Oxford Economics, predicts a strong turnaround for energy M&A, although short-lived. The industry is expected to see a rise in M&A from the sharp drop in 2016 of US$164 billion to a peak in 2018 of US$222 billion.

Chair of Baker McKenzie’s Global Energy, Mining & Infrastructure Practice Jim O’Brien explains, “Looking ahead, we expect the new normal for oil prices to strengthen the case for cost synergies, to be a key driver of energy M&A, as it has in recent decades, and to be an incentive for deal making. Counterbalancing this incentive is the reality that revenues will be substantially lower, undermining the financial case for deals.”

Forecast: mixed prospects for energy deals

  • In North America and Asia Pacific, consolidation within the energy and raw materials sectors should continue to generate transactions in the coming years.
  • A gradual recovery in oil prices will create greater economic and financial certainty in commodity-exporting economies, particularly in emerging markets. We forecast that oil prices will remain below US$60 per barrel until late 2019.
  • In the U.S. and Canada, the growing presence of small-scale oil producers will make consolidation costlier and less efficient than previous mergers involving oil majors.
  • China’s shift from commodity to services sector investments could also dampen energy transactions.
  • Ambitious global emissions reduction targets, such as those in the Paris Agreement, could also cause global demand for energy to fall more rapidly, making energy companies wary of pursuing scale.
  • Saudi oil giant Aramco, could also list in 2017 in what would be the biggest IPO in history. Saudi Arabia plans to modernize and diversify its economy.

North America and U.S. M&A predictions—all sectors

The BM/OE report calls for North America to remain the largest market for M&A transactions, accounting for about half of global M&A value in 2017 and 2018.

Key to the outlook is the policy agenda of the new U.S. administration, Baker McKenzie said. “While uncertainty prevails about the new president’s plans for trade and investment openness, we expect deal making to remain constrained in 2017, totaling US$1.25 billion. But assuming the new U.S. administration adopts a relatively pro-business policy agenda, we expect deal values in North America to pick up in 2018, rising to a peak of US$1.4 trillion.

Permanently Lower Oil Prices and Consolidation will Push Energy M&A to $222 Billion in 2018: Report

Source: Baker McKenzie

According to the report, M&A in North America dropped 15% from 2015 to 2016 because of uncertainty surrounding the U.S. election, the impact of the strong dollar on exporter competitiveness (particularly in Canada), and a slowdown in the commodity sectors.

Permanently Lower Oil Prices and Consolidation will Push Energy M&A to $222 Billion in 2018: Report

Source: Baker McKenzie

“Until details of President Trump’s legislative agenda emerge, particularly related to trade tariffs and immigration, we expect M&A activity to remain subdued, totaling US$1.25 trillion in 2017. However, the new administration’s plans for lower taxes on households and businesses, plus substantial infrastructure investment, should support investor confidence. As economic and political uncertainties fade moving into 2018, we expect North America boardrooms to follow through with deals put on hold in 2016 and 2017.”

The researchers expect M&A activity in North America to peak at US$1.4 trillion in 2018, followed by a more moderate downswing than in previous cycles because of fewer overly leveraged deals. “From a sector perspective, technology and healthcare will drive M&A activity in North America because of the U.S.’s strength in tech innovation and the aging populations in advanced economies.

“Further consolidation within the energy and raw materials sectors should also continue to generate transactions in the coming years,” the report says.

A PDF of the full report is available here.

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