The changing landscape

The return of M&A in 2016 and beyond. By Richard Dyson

In the late 1990s the oil price dropped from $21 to $8 a barrel1. Operators reacted to this drop by cutting back on operations, reducing staff numbers and lowering overall project spend2. This may sound like a familiar story to anyone who’s been following the oil & gas industry over the last few years where a similar phenomenon has been occurring.

The low oil price climate of the late 1990s led to a flurry of merger and acquisition activity in the industry. This started in 1998, when BP acquired Amoco for $48.2 billion. The threat of an enlarged BP seemingly nudged Exxon into buying Mobil for $82 billion a year later. Other companies picked up on this trend, as seen when Chevron bought Texaco for $100 billion in the year 20003.

When a surplus in supply of oil caused the price to drop in 2015, many looked back to the 1990s and began enthusiastically predicting an increase in M&A activity, particularly in mature basins like the North Sea. Augustin Eden, Research Analyst at Accendo Markets, stated the price drop could be the “beginning of an M&A rave”4. Yet merger activity did not increase. In fact, the number of deals done in 2015 were significantly lower than 20145.

There are many reasons for the lack of initial uptick in M&A activity after the price drop, but the key remains a pervasive lack of certainty in the industry regarding oil price6. And when different parties have opposed views on where they think the oil price will settle, it makes it very hard for them to agree on a price that suits all parties. Volatility is the enemy of M&A in all industries, and it’s hard to find an industry more volatile than oil & gas.

Operators also scrutinise what they are set to gain from a merger, and most major companies are now underrepresented in low cost production areas, meaning mergers with other major companies would bring them little benefit where they have similar strengths and weaknesses7 It’s hard to see where big merger opportunities may present themselves in the future.

A clear exception to the hiatus in M&A activity after the price drop in 2015 was the merger between Shell and BG Group in early 2016, a deal partly driven by Shell’s aspiration to own attractive assets in South America and Australia with low production costs. However, many industry insiders believe Shell had been eyeing BG Group closely for a number of years, and that this is probably the main reason that Shell CEO Ben van Beurden pushed the deal through so quickly despite pressure on him to renegotiate in light of the oil price downturn. And whilst the deal did occur in 2016 post-drop, in reality it had been in the pipeline for much longer and can’t exactly be designated as a merger deal caused directly by the change in operational circumstances.

And while the Shell BG Group deal may have made headlines around the world, the average monthly M&A deal count fell by a third in 2015. Excluding the Shell BG deal, M&A activity declined by two thirds in 2015 compared to the previous year8.

More recently, Deloitte reported that the upstream sector in the first half of 2016 had seen a slight uptick innumbers of deals vs. the same period last year, but the period saw a decline in total value compared to the first half of the previous year9. Realistically this means the slowdown in the M&A market is continuing. The oil price will need to begin to rise steadily, to make conditions more favourable to change this situation. More confidence and less uncertainty in the future oil price will help companies in their longer term planning, a luxury the sector hasn’t had in recent times. Potentially the OPEC announcement at the end of September which resulted in a small uptick in oil prices may help.

Looking more positively, assets are currently worth considerably more than they were at the start of the year, which should increase options as potential buyers are encouraged to re-enter the marketplace. This may also start encouraging companies to make divestments and banks to start foreclosing on loans. Certain analysts are now beginning to mark companies they believe could be taken out as a result of the renewed interest in the sector. Though it is worth noting assets are still a considerable way off previous peaks.

Looking beyond 2016 and into 2017 it is likely merger activity will increase, particularly if, as some in the industry are confident, the oil price increases and levels at $60 or above by the end of the year. Yet most of this activity will be large operators acquiring assets from smaller ones – to make small and strategic gains into new areas of exploration and technology. Vice President of Edinburgh-based Wood Mackenzie Andrew Latham believes future M&A will focus on assets rather than companies, and this smaller, more strategic type of acquisition activity distinguishes it from the megamergers of the 1990s. Moreover, after a challenging few years that saw significant job losses, most small firms don’t have many more costs to cut: they may be likely to accept approaches for their assets from larger operators as they struggle to make ends meet in a competitive market.

Wood Mackenzie predict major oil producers will rely on M&A for half of their reserve replacement in the future as they cut exploration budgets to weather the price downturn.Between 2015 and 2020, they expect the global industryto lower spending on exploration and development by as much as $1 trillion10. M&A is still very appealing; it can give companies a combination of advantages including access to the latest technologies and increased market exposure. So while the level of merger activity is unlikely to return to what it was in the 1990s, it will rise.

This changing M&A landscape may still prove challenging, but such a realignment should also be viewed as an opportunity for the industry. At io we value holistic thinking: all aspects of an M&A deal, both present and future, mustbe considered from the offset in order to assure its long-term benefit for a company. Our approach may lend itself very well to the smaller, more strategic acquisition deals of the future.


Richard Dyson is CEO of io oil & gas consulting. io oil & gas consulting is a new model of upstream consultancy that combines industry expertise and powerful thinking to deliver greater certainty into the design and planning of offshore oil and gas developments. io provides the right balance of management consultancy and deep technical and commercial expertise to effectively manage and deliver full field development plans.

For further information please visit: