Could M&A be on the rise in oil & gas?

Oil prices began to decline in 2014 as increased US shale production reduced the American dependency on foreign imports. As global production levels continued at an expediential rate, oil prices were driven down. It signalled the beginning of the latest economic recession to hit the industry, and in an effort to adapt to reduced oil prices, companies throughout the supply chain responded by cutting costs across the board.

Day rates were slashed, contracts renegotiated, projects cancelled, and large scale headcount reductions initiated.  The impact of low share prices and high operational costs have forced many companies to explore the opportunity for mergers and acquisitions in an effort to remain competitive throughout this challenging period.  

An industry shaped by M&A

In recent months oil prices have since stabilised and companies are beginning to look beyond current contracts and into the future.  Numerous senior industry executives have openly talked of the need for increased mergers, acquisitions, and joint ventures in an effort to adapt to the prolonged downturn.  However, much of any upsurge is heavily dependent on analysts and experts alike being able to identify when the oil & gas market is expected to turn.

Mergers, acquisitions and divestments have shaped the current oil & gas landscape:

  • ExxonMobil, ConocoPhillips, and Shell[1] have all undergone mergers to cement their presence as industry “supermajors”.
  • In 2010, drilling contractor Noble acquired Frontier[2] and its fleet of drillships in the Gulf of Mexico.
  • In an effort to increase their presence in the deepwater markets of Western Africa and Brazil, Ensco acquired Pride Drilling in 2011[3].
  • Shell’s acquisition of BG Group earlier this year for £35bn is the biggest in the sector for 10 years and gives Shell access to a leading position in deepwater assets and liquid natural gas. However, Shell have had to announce another $1bn (£800m) of cost savings in order to maintain the dividend in a period of low oil prices

Is the oil and gas market set up for an M&A upsurge?

A combination of low share prices, reduced revenues, and high net worth assets have seen companies explore the need for M&A and joint venture initiatives when approaching current and prospective work.  The opportunity to acquire new assets, contracts, and market access present an attractive option for companies looking to balance both the financial and physical risk accumulated with drilling for oil and gas.

However, in the current climate the continued uncertainty around recovery timelines present a significant roadblock to brokering any merger or acquisition.  Acquiring a rig fleet comprising of idle assets, or a service provider with no contract, would prove a crippling financial burden to any company. 

Creating the platform for success

Uncertainty will always engulf the transactional period of any merger or acquisition.  The pressures and subsequent consequences associated with any prospective M&A deal are great, and the integration is the most scrutinised aspect of the M&A cycle.  Nevertheless, studies show that two thirds of companies (across all industries) fail to realise the full benefits from an acquisition or merger.

The Moorhouse integration framework recognises three critical factors that drive integration programmes:

  • Clarity on the integration strategy and guiding principles
  • Effective control of the programme (clear governance and accountability, a reporting framework that provides visibility on status and key issues, supported by a robust benefits tracking mechanism)
  • Managing change (clear communications strategy for engagement with key stakeholders, early HR involvement, early development of the new organisation design)

By following these three principles organisations will be best placed to fully deliver the benefits identified in the pre-deal due diligence phase. 

Following the honeymoon period post completion, integration programmes are often at risk of losing momentum.  This is another symptom lending itself to the high failure rate associated with mergers and acquisitions.  Research has shown that a “second wave” of integration activity, 12-months following any deal, can help to drive out additional savings of up to 20%.  This is driven by a greater understanding of the acquired business. We recommend a health check assessment of the integration programme which can often identify further cost savings or integration opportunities.

What next for M&A in oil and gas?

Any estimated recovery in oil price is expected to follow a U-shaped curve rather than the V-shape[4] which is applied to 2009’s downturn.  The current downturn has seen oil prices hit a low of $27 per barrel and plateau at $45-$50.  In an effort to curb capex outgoings, investment in exploration has been curtailed and many drilling rigs, vessels, equipment, and services have gone from being a company’s greatest asset to a financial constraint.

Significant signs of oil price recovery are not expected until at least 2017, and there is fear it could be years before the market bounces back.  Nevertheless, should oil prices begin to show any signs of recovery over the next 12 months, we could see a renewed level of M&A activity across the industry. 

Shell’s acquisition of BG Group and Schlumberger’s 2016 merger with Cameron are direct consequences of the industry downturn and both present signs of an evolving market.  In April we saw further evidence of this when Premier Oil acquired E.ONs UK North Sea assets. The opportunity to acquire high net-worth assets at a significantly reduced cost; access markets that had previously been occupied by competitors; or take over lucrative contracts with new clients, means that when the demand for further oil exploration increases, M&A activity will likely follow the same trend.

While the current market situation may offer a platform for increased M&A activity; Mike Creasey, Client Director of M&A at Moorhouse, suggests that given the volatile nature of oil prices, it is even more imperative that oil companies execute their integration programmes at pace and deliver the full level of synergies.

An extended economic downturn has driven operational expenditure to a damaging high for oil companies that have seen revenue streams slashed.  Increased merger and joint venture activity could offer a way to alleviate some of the heavy financial burden caused by a low oil price and reduced demand for exploration. Either way, senior industry executives continue to work around the clock to ensure that when signals point towards change, and the demand for exploration increases, they are in the best strategic position to react.  Over the next few months and years we might likely see the evidence of this through an upsurge in M&A activity that could significantly alter the industry’s landscape.





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Lewis Hall Manager