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AT Kearney - Mergers and acquisitions shakeout

AT Kearney - Mergers and acquisitions shakeout

Sep 04, 2016
6 min read
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Continued low oil prices will cause more oil and gas companies to face greater levels of debt, which in turn will force them to look for buyers. This could lead to a debt-driven shake-out of the industry.

"Players with a high-cost portfolio and a high level of debt are at risk of survival. This is mostly true for some of the independents operating in the US and in the North Sea," said Mrs. Perniceni.

This year will be a pivotal one as cash and liquidity concerns will drive a shake-out for those with high costs and leverage, the report states. Operators holding high debt, especially those relying on reserve-based lending, could see their funding squeezed and credit facilities reduced, forcing them to shed low-performing assets.

The report shows an analysis of North American shale focused players and North Sea independent players, mapping the percentage of their portfolio based on their break-even point as well as their ability to further raise funding from the banks.

"In the North Sea multiple fields have a break-even point above $45 per barrel and many independents have a relatively high-cost portfolio. If you match this with the ability of these companies to finance their operations, you can identify some that are struggling. This situation represents a driver for increased M&A activity," Perniceni added.

Deals down

In 2015, oil and gas M&A activity was limited with only a few major deals dominating the headlines such as Royal Dutch Shell’s US$81.5 billion acquisition of BG Group. The total upstream deal value declined by 13 per cent in 2015 compared to the previous year; if the impact of the outsized $81.5 billion Shell–BG deal in 2015 is excluded, total upstream deal volume dropped by 54 per cent, according to the report. Oilfield services total deal volume declined 61 per cent and with the exception of the Cameron International–Schlumberger transaction, the top 10 deals involved financial investors rather than incumbent firms within the industry purchasing oil and gas assets.

"In 2015 the deal volume dropped from 2014 but value remained stable thanks to the Shell-BG deal. We believe that the overall drop in M&A deals was due to the volatile oil price environment which hindered the ability of buyers and sellers to converge on a price," said Perniceni.

Company strategies

International oil companies (IOCs), according to the report, will continue to focus on structural cost reduction and portfolio high-grading, making selective acquisitions and continuing divestment programmes, especially in marginal fields and downstream assets. BP, Chevron, and Shell for example, have announced over $45 billion in combined asset sales over the next few years. Divestments and selective acquisitions are more likely than more mega-mergers.

"IOCs are in the M&A arena, in particular, a number of them are looking to upgrade their portfolios and are looking at selling off some non-core assets. The focus for IOCs has shifted from growth to value," Perniceni explained.

Stronger independents will have the opportunity to acquire assets at a deep discount as debt covenants and redeterminations will play a larger role in triggering M&A. Financial investors will also seek opportunities to put capital to work, targeting different levels of return through varied M&A approaches.

"Stronger independents have the opportunity to play a bigger role in the market and grow in size through acquisitions."

According to Perniceni, oil service companies are under a lot of pressure in the current market context.

She added: "The drop in the oil price has seriously hit the oil service companies, substantially reducing their volume of business and drastically increasing pressure on their rates. We see an opportunity for consolidation, with the large oil service companies acquiring and integrating the smaller ones to achieve cost synergies, expand their market coverage and offerings."

Financial investors have increased their presence in the oil and gas M&A landscape over the last five years to account for $100 billion in 2015, representing 21% of the deal value. Recently their focus has been mainly on oil service companies, but there are signs that they are expanding their interest upstream to pursue larger and more complex transactions.

Middle East focus

Companies, including selected national oil companies (NOCs), may capitalise on the current climate to secure reserves or expand operations and financial investors are busily gearing themselves up for deals.  Any run-up in oil prices lasting more than a quarter will likely be met with a flurry of deals.

The report states that with lower oil prices, OPEC has maintained production to help sustain fiscal revenues, but lower prices have significantly impacted budgets. Continued fiscal pressure will push many countries to focus internally rather than diving into international M&A markets. Saudi Aramco may go to market with a modest portion of its shares for an initial public offering to raise funds. This would be a part of a broader package of economic reforms to diversify the economy beyond oil and build a bigger role for the private sector.

“NOCs are typically leveraged by their host countries to fulfil the country agenda. What we see now is that many of these countries are in an austerity situation as they are feeling the pinch of low oil prices. This means that NOCs are more focused internally, on restructuring and cost reduction plans, than externally. This is the case for the Middle East NOCs and what we see for them as a primary focus, for the current year and the next, is efficiency enhancement and growth primarily from downstream expansion to favour economic development and diversification of the host country,” Perneceni added.

"We don’t see much M&A happening this year or next for NOCs from the region. But what we do see are opportunities for international players to partner with NOCs to further develop the country’s downstream sector. We see this model continuing across the GCC states."

Outlook

In conclusion, A.T. Kearney says that 2016 will require tough decisions and a survival mindset for the weak with a variety of unique opportunities emerging for buyers and sellers alike. 

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