The falling price of oil could result in a new wave of mergers and acquisitions (M&A) that would have a significant bearing on the shape of the industry for the next generation.
Having fallen from highs of $115 to below $50, then ‘recovering’ to the circa $60 mark, the level at which crude is being traded has been cut almost in half.
The trend is significant as the last time 50% was shaved from the price of a barrel of oil, the market saw a wave of mergers, which went some way to creating the super majors that we see today. This took place in the late 1990s, when the price point fell from $20 to $10.
A new report from AT Kearney has warned that the most recent fall could lead to a similarly turbulent period of consolidations and buy-outs.
“Many things have changed since 1998,” the paper said. “Demand has shifted east, companies are finding and developing more challenging and higher cost fields, and most recently, the US-led shale revolution and its stealthy, growing impact on supply has the United States now producing more than nine million barrels a day.
Although oil prices rose by $90 a barrel, margins in the industry have not. So a >50% price drop now is likely to have a bigger impact than the drops in 1999 and 2008.”
Jason Rosychuk, senior associate at Pinsent Masons, said that while companies have always kept an eye on the market for potential plays, thre is currently an increased sense that opportunity is on the horizon that wasn’t evident in more stable periods.
“The volatility means that there is opportunity, and people will be preparing to move. A good M&A deal takes at least six months of work, so it really is time to start tooling up for negotiations, and when there is a bit more clarity in the market, you can look at price,” he said.
If speculation are to be believed, then Emirates National Oil Company is doing just that, with reports that the national oil company has appointed a five-person panel to weigh up potential acquisitions that could benefit the business.
Rosychuk adds that there may be a reluctance to move too quickly – particularly with prices still fluctuating, but that one big move could act as the signal for more.
“It’s like when you’re thinking about renting a house; you see the market moving in a certain way and you can judge when to make your move based on that,” he commented.
“Being in a position to rubber-stamp a deal might be months away, but firms will be looking now, and the market is looking to see who is brave enough to move first, and how those deals and negotiations work out. Like everything, it’s a wait and see approach where if the first move or moves work out well, you’ll see a lot more then follow. That is exciting for people in the industry.”
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Richard Forrest, partner at AT Kearney, who helped put the report together, believes all the signals point to a period of M&A, and agrees that the industry is waiting to see where the oil price settles before significant moves will be made.
“An interesting point is that companies will react in three ways, regardless of the actual specific price per barrel as long as it stays low for a sustained period. Two of these reactions have already become apparent.
“Reaction number one is a focus on cash flow where companies will find ways to conserve cash and defer capex – that’s the easiest thing to do. Second is to reduce the cost structure to meet the new oil price situation and weather the storm. We are seeing both these reactions already across the industry. The third is – and this takes a little more time to come into play – is M&A.
The reason it takes more time is that when you come off $100 a barrel down to $50 or $60, sellers and buyers would have to come to an agreement on the value of the asset. There is an overhang of assets in the industry that could find new homes if there is an agreement on price.”
What we are unlikely to see is large-scale consolidation of the majors in the market – there simply isn’t the scope to do so, nor the need given their wealth and position in the market.
Instead, companies are likely to take more of an interest in technological plays, continuing a recent trend, according to Rosychuk.
“I think we saw companies look to invest in technology before the oil price began to fall; it was a preference over geology. If you look at the recent Abu Dhabi licencing round, it was putting a lot more emphasis on knowledge transfer and technology application and that goes back for two or three years, so people have seen this as the way forward for a while now.
Kuwait made big investments in shale companies, and Aramco are looking at unconventional plays, as have Oman. This was in motion before the latest round of price falls, so I can only think that is a trend that will continue.”
In a market that is looking for innovation and technology, the oil field service sector – where a huge merger deal between Halliburton and Baker Hughes is currently being pushed through – will be attracting interest from both bigger energy players and the investor community.
“In oil field services, a couple of dramatic things could happen,” Forrest said.
“First, the oil price fall and demand fall has seen all the front end exploration and drilling services being hit hard, and that will work its way throughout the industry. But that demand drop is significant and the cost pressure coming down from the industry on that oil field services is significant, and they are going to be under pressure.
“The oil field service industries has a set of well-established players and then a plethora of smaller, niche tech or service businesses, which will also be challenge. Do we see that group being an opportunity to consolidate, or be acquired by bigger players? Yes. But there is also a third group, which is the investor community, which have been investing in oil field services, as it sees good margins and good demand.
“They also use them as a franchise model, so if they’ve done well in the North Sea, they will look to take the technology elsewhere. We see the investor community moving into the oil field services area as they have the capital. The oil field services landscape could potentially go through big changes – it’s going to be an interesting area to watch.”
Similarly, some of the smaller or more leveraged players in the independents could be forgiven for feeling vulnerable, while others may use this period of instability to add and improve their business.
“It’s going to be tough for some of them as there is going to be a weeding out of some of the independents, as there always is in situations like this,” stated Rosychuk.
“When you look historically, there is a stage of consolidation that the companies go through. With the right strategy, approach and a bit of luck, this is the scenario where a strong independent can really move up the value chain, and become a much bigger player. They are nimble and agile, and it allows them to adapt quickly and they are used to ups and downs.
“You can’t underestimate the independents, and my belief is that they are crucial to keeping the global oil and gas industry vibrant.”
Facts:
– 1998 The last time there was such a pronounced percentage fall in oil prices.
– $10 Price per barel at the end of the price crash in the last 1990s.
