Oil and gas industry expects strong rebound in M&A

Daniel Reinbott's picture
Daniel Reinbott, Partner, Ashurst LLP
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Peter Vaughan, Partner, Ashurst LLP
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In the face of a slow commodity price recovery in the oil and gas sector, our latest research report “From Survival To Growth In A New Era” has revealed that 83% of companies expect a 'substantial' increase in mergers and acquisitions (M&A) in the next three to five years, including an average expected increase of 50% by volume this year compared with 2015.

Our report compiles the views of CEOs, CFOs and general counsels across some of the world’s largest oil and gas companies with a combined turnover of US$5.3 trillion and outlines new insights relating to the breadth of industry spending cuts and attitudes towards debt, as well as highlighting steps to be “match fit” for a price recovery.

The key findings from our report include:

  • A fast recovery in oil prices is not anticipated - only 15% of respondents estimate that oil will be at US$60 or above in 12 months' time.
  • M&A deal volumes are expected to increase by 50% in 2016 and sustained growth in M&A activity is anticipated on a three to five-year horizon, as companies restructure asset portfolios, seek new growth options and act opportunistically.
  • APAC is identified as the most attractive region for investment with 31% of companies expecting to pursue their next investment in the region, followed by Africa (22%), Europe (19%) and the Americas (15%).
  • Capital investment has been frozen or cut by 87% of companies in their most recent strategic plans (somewhat surprisingly, 13% of respondents indicated that their companies were planning to increase capital spending this year).
  • Just 17% of companies have immediate plans to reduce debt levels, while in three to five years almost half of companies expect to have higher debt levels.
  • More than one-third of companies plan to issue new equity to support growth in the next five years, with this option most popular for companies in Asia Pacific (37%) and Europe (31%).
  • 85% of oil and gas organisations believe that the 'bust' phase of the current cycle has been atypical in terms of its depth and duration, and just over two-thirds conceded they were underprepared for the conditions experienced during the last 18 months.

Four key steps to be prepared for a recovery: Our research highlighted that many oil and gas companies are actively taking key steps to ensure their businesses are strongly placed to take advantage of a recovery in commodity prices.  Some of the steps which companies are taking to ensure they are “match fit” for a price recovery, include:

  • Maintaining good relationship with all stakeholders: Positive engagement with the full spectrum of stakeholders (including contractors, government and financiers) is likely to yield benefits, including keeping up good information flow and minimising any ‘nasty surprises’.
  • Being creative about financing: In the current market environment, ‘vanilla’ financing arrangements are rare and reserved-based lending is challenging. Funding through alternative sources can be key to opening up opportunities, including asset sale and lease-back and vendor financings.
  • Alignment with business partners: Those with well-aligned business partners will be better placed to realise objectives. Taking time to select the right aligned business partners, including joint venturers and government, can avoid future impasses and unlock value.
  • Optimising assets and footprint: Optimisation of assets and footprint will enhance efficiency and allow organisations to pursue strategic objectives. This can be achieved by M&A, sale & lease back arrangements and collaborative opportunities, such as tie-ins.

Conclusion: The expected spike in M&A activity, which is highlighted by our report, is supported by the emergence of a number of recent high profile and large scale M&A transactions and various sales processes initiated by IOCs in the Asia-Pacific region. Sellers and buyers will, however, need to align expectations on risk allocation, particularly for ageing assets, and valuation, where some gaps have been evident in recent times, if potential transactions are to be successfully consummated.

Join the Conversation: In light of recent M&A developments between ExxonMobil and InterOil, do you expect more M&A in the oil and gas sector? Leave a comment below.

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Daniel Reinbott, Partner at Ashurst LLP spoke at the Gastech Conference last year. Don’t miss the opportunity to speak at Gastech 2017submit your abstract by September 9, 2016. The conference topics are split between commercial and technical themes – simply submit a short abstract (800 words maximum) in order for our Governing Body to review and then vote on the successful chosen papers.

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