A.T. Kearney expects M&A wave in Oil & Gas industry

04 February 2015 Consultancy.uk

In a recently released report by A.T. Kearney the consequences of a plummeted oil and gas price are considered in the area of mergers and acquisitions. The strategy & operations consultancy notes that particularly companies with strong balance sheets can snap up deals, but that all parties in the oil & gas sector may do well from the changing environment if they take a strategic approach.

In a recently released study by consulting firm A.T. Kearney, titled "Mergers and Acquisitions in Oil and Gas”, the mergers and acquisitions landscape in the oil and gas sector for 2015 is analysed. Since the collapse of the oil price over the past six months, falling from $115 a barrel in June last year to around $50 a barrel in January, a knock on effect is expected by the firm into the commodity price dependent sector. With the collapse comes pricing pressures, and according to the report, this will force companies to move – like they did in the late 90s* – into mergers and acquisitions to reposition and reshape themselves within the energy sector ecosystem.

Supply factors and economic woes push oil prices down

While mergers and acquisitions were already on the uptake in 2014 relative to 2013, the growth of such deals is only expected to accelerate in reaction to the falling oil prices. Richard Forrest, global lead partner for A.T. Kearney’s Energy Practice and co-author of the study, states: "Our analysis and discussions with industry executives revealed the likely onset of a new wave of mergers and acquisitions across the value chain in the next 6 to 12 months." The advisor adds that companies well situated and with healthy balance sheets have the upper hand in the coming struggle to find good deals, while smaller companies will face considerable difficulty surviving – warning however, that the window of opportunity is small and highly dependent on energy commodity prices.

Vance Scott, A.T. Kearney’s global oil & gas practice leader, adds: "We expect to see the largest M&A deal value as well as largest share of deals in the upstream segment where focus on improving performance on a $/BOE basis will dominate. E&P players will drive internal effectiveness measure and portfolio repositioning that will encompass entire company sales and mergers. Consolidation in midstream will continue to be driven by the 'MLP advantage' whereas oilfield service provider consolidation will be driven by business volume changes and cost reduction needs.”

The authors highlight it will be key for players in the industry to take a strategic approach to M&A. “The winners will be those firms that anticipate potential outcomes, choose how and when to act, and understand how these decisions will impact their positions and competitive dynamics,” says Forrest.

* In the 90s, the severe price drop between 1998 and 1999 (<$10 a barrel) ushered in a wave of mergers, creating the super majors of today: Exxon and Mobil in 1998; BP, Amoco, and ARCO in 1998 and 1999; Total, Petrofina, and Elf in 1999 and 2000; and then Chevron and Texaco in 2000.

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.