M&A deals in oil and gas set to increase as oil price expectations stabilize
Convergence of oil price expectations above the $30 per barrel lows of early 2016 leads buyers and sellers to close M&A deals.
Disruption in the oil and gas industry resulting from digital technology trends and energy transition will drive companies to explore M&A as a lever for better strategic positioning in the future.
NEW YORK, Oct. 11, 2017 /PRNewswire/ — Converging oil price expectations of investors and companies in the oil and gas sector creates a strong platform for M&A deals to flourish, according to A.T. Kearney’s 2017 Oil and Gas M&A study. The report, released today, reveals a sharp pick-up in deals announced at the end of last year, although 45 percent of the $850 billion worth of transactions declared since January 2016 is still pending.
“The oil and gas industry has a tremendous opportunity to benefit from stabilizing oil prices that can fuel deal activity in order to improve balance sheets, and raise cash for capital projects through divestitures,” commented Brent Ross, principal, A.T. Kearney and co-author of the study. “In addition, many buyers need acquisitions to replenish reserves that dwindled during the challenging environment of the past two years.”
The study identified strong optimism for the year ahead, with more than two-thirds of the executives surveyed expecting M&A to rise moderately or even aggressively in the year ahead. Improved market conditions have already sparked several megadeals since 2016, including Sunoco’s $50 billion purchase of Energy Transfer Partners, the $43 billion merger of Enbridge and Spectra Energy, and a $32 billion deal that combined GE’s oil and gas operation with Baker Hughes.
“Our research indicates renewed interest in downstream M&A, especially among petrochemicals companies caught up in unprecedented deal making in the wider chemicals sector. Also fuelling M&A are international oil companies (IOCs), upstream independents, and financial investors with interests in upstream US shale and North Sea acquisitions as well as consolidation within oil services,” said Alvin See, principal, A.T. Kearney and co-author of the study.
With signs that investment prospects are improving, the study indicates that financial investors will be more active in 2017 and are open to new deal structures. With oil prices holding steady and industry sentiment improving, investors are moving to capture acreage, secure midstream assets with reliable returns, and capitalize on opportunities in oil services.
“Long-term uncertainty as a result of energy transition, concerns of peak oil demand, and digital trends, means companies are also pursuing strategic transactions in alternative energy and new capabilities centred around digitalization to be better placed in a changing energy value chain,” commented Richard Forrest, A.T. Kearney global lead partner for the Energy Practice and co-author of the study.
The fog is lifting on the oil and gas M&A landscape, but the horizon remains hazy. Companies need to retain a strong focus on cost control and leverage digitalization to improve the efficiency and effectiveness of operations and capital deployment. They will also need to prepare for an uncertain future with a shift of strategies to reflect accelerating energy transition and the impact of new disruptive technologies. Mergers and acquisitions will be an important lever for oil and gas companies, both in the short and long term, to remain successful.
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About the Report
The analysis in this paper is based on an A.T. Kearney global study of the oil and gas industry across the entire value chain, from the oil majors, national oil companies, and leading independents to service companies and financial investors. The study provides an outlook for M&A based on a survey and interviews with top industry executives conducted in the first half of 2017.
The study incorporates oil and gas industry M&A research from January 2003 to June 2017, with companies classified by Standard Industrial Classification (SIC) codes. SIC code categories are based on the US Department of Labor’s Occupational Safety and Health Administration. In some cases, modified classifications are used to provide a more accurate reflection of a company’s business activities.
The following transactions are not included in our analysis:
>> Deals where both partners or their parent companies are not in the oil and gas industry
>> Deals classified by Dealogic as buybacks
>> Deals announced outside of the analysis period
Most displayed transactions are on an annual basis unless otherwise stated. Deals are on record by date of announcement rather than date of completion, as this is closer to when they were negotiated.
Dealogic is the main source of all M&A data. Rystad Energy provided all reserve, field economics, and production-related data as well as the information used to classify independents.
About A.T. Kearney
A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world’s foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit www.atkearney.com.