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 reveals a sharp pick-up in deals announced at the end of last year, although 45 percent of the US$850 billion worth of transactions declared since January 2016 is still pending.
“The oil and gas industry has a tremendous opportunity to benefit from stabilising oil prices that can fuel deal activity in order to improve balance sheets, and raise cash for capital projects through divestitures,” said 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.
“In the Middle East, we expect to see an increase in M&A and partnerships in the Oil & Gas industry. National oil companies in the Gulf will continue to seek access to the key technologies and capabilities that they need to expand their domestic business and to create more value. In parallel, they will continue to explore partnership opportunities to secure access for their crude and fuel products in international markets, while capturing a larger share of the profit pool,” said Ada Perniceni, partner, A.T. Kearney and co-author of the study.
Across the world, improved market conditions have sparked several megadeals since 2016, including Sunoco’s $50 billion purchase of Energy Transfer Partners, the US$43 billion merger of Enbridge and Spectra Energy, and a $32 billion deal that combined GE’s oil and gas operation with Baker Hughes.
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,” said 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 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.