They say that for every action, there is a reaction; when the action is the price of oil falling so dramatically, the reaction is one that has been felt not just in the oil and gas world, but across multiple sectors, from construction and hospitality, to the stock market and beyond.
Rewind 18 months and things were very different. Oil prices were floating around the $110-$100 a barrel mark, and perceived wisdom was that the price could settle around the $100 a barrel mark over the long-term (for some context, during the run-up to the independence referendum in 2014 in Scotland, the ‘yes’ campaign based the value of the country’s oil reserves at $113).
With such bold predictions, it is not surprising that many companies have been caught out by the fall, leading to problems with cashflow and payments. And it isn’t just the industry’s smaller companies that have been affected, with leading International Oil Companies shedding jobs from their upstream and drilling operations in an attempt to shore up their balance sheets.
In such a volatile and unpredictable market, oil consultancy Wood Mackenzie believes that the market could be ripe for a number of mergers and acquisitions – a stark contrast to 2015.
Wood Mackenzie’s analysis shows that 2015 was the slowest year for oil and gas M&A in over a decade. Average monthly deal count fell by over a third, compared with the preceding 24 months. Excluding Shell’s exceptional $82bn takeover of BG, deal spend collapsed by two thirds; only 14 deals higher than $1bn value were announced, compared with 46 in 2014.
Luke Parker, corporate analysis research director for Wood Mackenzie said: “Uncertainty over oil prices continued to drive a wedge between buyers and sellers, sustaining a slowdown in activity that began in October 2014. With long-term oil prices so fundamental to the success or failure of M&A, and costs still in the process of re-setting, most were reluctant to commit to company-changing deals.
“Whether oil prices move up, down or nowhere at all in 2016, pressure to act will build, on both buyers and sellers. Exactly how the M&A market recovers will depend on how oil prices move in 2016, and where people expect they will move to beyond that,” Parker added.
Taking a view of the potential for market consolidation in the GCC. Gaurav Sharma, an oil market analyst, said: “The UAE has great potential, especially in terms of its NOC’s integrated and R&M outfits (e.g. ENOC) acquiring tangible downstream assets from private sector players. Alongside refining and petrochem plays, ancillary storage assets could emerge as a side story.
“Iran also has immense potential, but it is contingent upon what sort of regulatory regime emerges when sanctions are lifted, how much of foreign direct investment Tehran welcomes (especially in terms of percentage of foreign ownership) and of course the prevailing geopolitical climate of the day. One thing is certain, the Iranian petrochemical sector is in dire need of substantial technological and financial investment. Finally, the Saudi market is getting very interesting, especially if Aramco decides to publicly list part of its equity.”
On the flip side, the region’s National Oil Companies have both the resources and desire to enter the M&A market, and could make a play for the Asian markets, according to a report by Emirates NBD.
“In the GCC energy sector, identifying opportunities in a period of distressed oil prices will be key. In the MENA region and the GCC in particular National Oil Companies (NOCs) and government backed strategic oil companies are investing the reserves they built on the back of years of high oil prices to leverage opportunities afforded by the sales of distressed assets,” said the market commentary.
“While international oil companies for example are beginning to divest the portfolios of some of their downstream assets to focus on their upstream segment, regional energy players may see opportunities to buy into sectors that fall into to the wider diversification objectives of the region. Furthermore, It is important to note that a strategic dimension is a key part of NOC’s investment agenda, and this means some deals will be made for the long term goals of cementing geographic links for example. So we can expect to see a rise in deals between the region and Asia in particular, as the Asian continent is by far the biggest puller of the region’s oil and gas resources.”
The report continues: “Acquiring stakes from IOC’s that fall into the strategic objectives of the regional energy producers is another ongoing development in the region’s energy M&A deals scene. Last year the Kuwait Foreign Petroleum Exploration Company a subsidiary of Kuwait Petroleum Corporation purchased Royal Dutch Shell’s 8% stake in Australian LNG venture Wheatstone, further adding to its existing 7% stake.
While there is a loose agreement by from experts that the low oil price could prove to be the trigger for M&A moves, is harder to find common ground on where the money will be spent. Dave Ernsberger, global editorial director of Platts, said: “The Middle East is partially insulated from M&A activity because so many companies and assets are state-owned, in whole or in part. But there are many privately-held and listed companies engaged in the supply and distribution of oil, refined products and petrochemicals, and many of these will be catching the eye of potentially cash-heavy suitors in the region and elsewhere.
“Generally speaking, there is a lot of interest in buying companies that are operating downstream, and with logistics assets, so candidates for M&A that have storage, pipeline, shipping or other downstream assets may attract particularly strong attention.”
But Sharma is not so sure, telling Oil & Gas Middle East: “I do not agree that we will see an M&A splurge in the downstream sector owing to a classic paradox created by the oil price fluctuation. Around the turn of the current decade, when the oil price started recovering from the slump caused by the global financial crisis, high risk / reward permutations returned with a vengeance for upstream oil and gas. Subsequently, downstream assets found less favour among oil majors, especially in Europe, where refining and marketing businesses were losing money, facing tepid margins and were being squeezed by newer, more efficient state-owned refineries in the Middle East.
“Fast forward to the ongoing oil price slump, first signs of which surfaced in July 2014, and we see refining and petrochemical ends of the oil majors’ business contributing more meaningfully to corporate profits as the upstream end of their business struggles. Of course, assets would be up for grabs.
“However, I don’t expect the bid/ask differential to narrow considerably triggering a wave of asset sales. Sellers would be reluctant to sell at a time when the downstream end of their business is doing relatively well and would value the asset higher. At the same time, given wider challenges in the market, buyers would not like to pay over the odds either.”
