M&A activity set to reshape Oil & Gas industry in 2016

Last year the oil & gas market saw a considerable decrease in M&A activity. This is expected to change this year – irrespective of changes to the price of Brent. If oil prices remain low, smaller players will get into financial strife and pursue asset sale and consolidation, while if oil prices pickup, bargain hunters will seek to ramp up inorganic growth before competition heats up. The result: a wave of deals set to reshape the energy industry.

The oil & gas sector has come under considerable pressure over the past 15 months as the price of oil dropped more than 60% from a high of $110 a barrel at the end of 2014. The lower Brent price sent a tidal wave through the industry – since more than $100 billion has been slashed from expenses and the operations of an estimated 1,000 oil rigs have been suspended. As a result, more than 250,000 professionals have lost their job since the oil price started to fall last year.

According to a new report from Wood Mackenzie, a consulting firm specialised in the oil & gas domain, the developments have also hit the M&A appetite in the industry. In 2015 the monthly deal count on average fell by over a third, compared to the previous 24 months, while the value of deals – excluding Shell's $82 billion mega takeover deal of BG Group – plummeted by two thirds. Last year also saw a dearth of deals above a billion, with 14 taking place, compared to 46 a year earlier.

The low level of M&A activity seen last year is not, according to the report, expected to continue this year. According to the researchers the low oil price, in relation to recent trends, is placing considerable pressure on small oil & gas companies – many of which are currently operating in survival mode. If the price of oil remains low, more and more companies will be forced to sell assets and merge with businesses in order to free up capital with which to survive the low oil price conditions.

As a result, many potential targets, vulnerable players, will be going relatively cheap, “While the top tier of International Oil Companies (IOCs) can largely take action to ride out a further year of low prices, the next tier down may have fewer options. Deeper strategic action, including asset sales, will be needed,” says Luke Parker, Research Director at Wood Mackenzie. “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.”

According to an analysis from the consultancy itself however, the price of crude oil is expected to pickup this year, with the Brent price expected to reach over $65 per barrel in Q4. The increase in oil price may itself spur companies to engage in inorganic growth activity by picking up deals before competition across the market picks up. Greig Aitken, Principal Analyst at Wood Mackenzie, adds: “As we saw in Q2 2015, when sentiment takes hold that oil prices are on the path to recovery, M&A activity can pick-up quickly. First mover advantage is key – securing deals before competition grows and inflation sets in. At the moment, companies are focused on survival, but this could quickly shift back to growth, in a higher oil price environment.”

Regardless of what happens to oil prices, Wood Mackenzie is forecasting a significant “ramp up” in mergers and acquisitions during 2016. Companies in the market earmarked by analysts as acquisition targets include Anadarko, Apache, ENI, Occidental Petroleum, as well as companies such as Apache, Tullow, OMV, the BASF-division Wintershall and Edison.

Changing demand
The movement of oil prices in the coming years and its impact remains a contested subject. Analysts at McKinsey & Company for instance recently forecasted Brent prices to return to $60 plus from 2018 – while Wim Plaizier, a partner at A.T. Kearney, warns that irrespective of prices the fundamentals in the sector are in a state of flux. “Structural demand is now lower due to increases in sustainable energy growth and a decreased demand from China as growth slows.”