After a challenging year for the oil and gas industry, 2016 will be pivotal for the industry as it faces a debt-driven shakeout and M&A takes center stage in many companies' transformation strategies.
For oil and gas companies worldwide, 2015 was an extremely challenging year. Overall M&A deal value held steady from 2014, but the number of deals dropped markedly. To explain why companies largely curtailed M&A activity in 2015, industry executives repeatedly point to one thing: oil price volatility and the deep uncertainty it engenders.
We are in a pivotal year in 2016 where M&A is taking center stage in the transformation strategies of many companies. To understand how the market could evolve, we spoke with dozens of senior executives and performed a global study across the entire value chain—from the oil majors, national oil companies, and leading independents to service companies and financial investors.
Our interviews with industry leaders find that:
Prolonged depressed and volatile oil prices are forcing companies to structurally reduce costs beyond traditional levels (e.g. price concessions from suppliers, laying off people).
Financially weaker operators with high debt are facing liquidity issues and will be forced to sell to secure cash or have credit facilities withdrawn
At the same time, IOCs and larger stronger independents will be looking to streamline their portfolio and sell
There are limited buyers in the market, but this represents an opportunity for stronger companies and financial investors, who have been gathering dry power, with a long term view
However price volatility is creating significant uncertainty and is delaying M&A decisions and actions – expect more creative deal structures to help bridge this uncertainty. In our view, 2016 is the year in which an array of pivotal decisions will be made across the oil and gas sector:
Independents. Cash and liquidity concerns will lead to a shakeout for those with high costs and debt, but stronger independents will be able to acquire assets at a deep discount. As pressure builds, debt covenants and redeterminations will trigger M&A or bankruptcy with debt holders taking a more definitive role.
International oil companies. The focus is on structural cost reductions, new strategies and operating models to succeed in a low oil price environment, and portfolio high-grading. Divestments and selective acquisitions are more likely than mega-mergers.
National oil companies. Host governments’ fiscal pressure will limit acquisitions, while local and global geopolitics will shape priorities. In the Middle East, the main focus is on fiscal austerity, while in China, opportunistic oil and gas M&A will play well into President Xi Jinping’s “One Belt, One Road” vision.
Oil service companies. Survival in tough conditions is the objective as the “price shock” radiates throughout the oil value chain. This year will bring consolidation as smaller companies become targets.
Financial investors. Financial investors have pulled together significant oil and gas-focused funds, with dry powder (cash reserves and liquid assets) yet to be drawn. The funds will aim to maximize long term value by acquiring prime assets cheaply.
Others. Master limited partnerships (MLPs) were a major source of deal activity in 2015 but deal activity will slow down this year and remain subdued until upstream activity picks up.
The year ahead will require tough decisions and a survival mindset for the weak with a variety of unique opportunities emerging for buyers and sellers alike. For those willing to think and strategize creatively, 2016 will be transformational for individual companies and for the industry’s long-term future.