Sunday, 17 January 2016

LOW CRUDE OIL PRICES: POSSIBILITY OF MERGER, ACQUISITIONS OF OIL FIRMS

There are indications that the plunging crude oil prices might trigger more merger and acquisition activities in the upstream oil and gas sector this year.

A new report from Wood Mackenzie tagged ‘M&A Outlook for 2016’, stated that, should oil prices stay low, companies will be forced to sell assets and merge businesses in order to free up capital, cut costs and survive amid growing financial pressures.

Forecasting a possible rebound in oil prices in 2016, the report forecasts it will happen later in the year, with Brent rising to over $65 per barrel in fourth quarter, making companies to move quickly to catch the next up-cycle and re-focus from survival to growth.
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 $82-billion takeover of BG Group, deal spend collapsed by two thirds; only fourteen deals higher than a billion dollars in value were announced, compared with 46 in 2014.


Wood Mackenzie Corporate Analysis Research Director Luke Parker explained: “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. Wood Mackenzie expects that, should the current pricing gloom persist, deal flow will increase in 2016.

“The drivers behind deals, and the types of deals we see, will differ this year as potential sellers come under increasing financial pressure. Mounting distress will force more companies to market: balance sheets will become ever more stretched without asset sales to balance the books. Financing options will be more limited: debt and equity investors are unlikely to be as welcoming as they were in 1H 2015, when expectations were for a quick rebound in prices.” (Source: Guardian)