Shell- BG merger a sign of ‘ Darwinian’ mood of oilpatch
The $ 70- billion US megamerger between Royal Dutch Shell PLC and BG Group PLC highlights the “Darwinian” mood of the oil and gas industry with the strong looking to pounce on the weak, says veteran industry analyst Peter Tertzakian.
“We saw it in 1998- 99, when Exxon Corp. and Mobil Corp. merged and BP PLC and Amoco Corp. merged — the theme is the same,” Tertzakian, managing director and chief energy economist of Calgarybased ARC Financial Corp., told the Financial Post. “Companies that can reduce their costs and achieve economies of scale are going to come out stronger. This is going to be very Darwinian — the weaker will die off.”
Oil and gas companies are reeling from a severe commodity price crash that has seen crude oil and liquefied natural gas prices decline by more than 50 per cent within the space of a few months.
Like their global counterparts, Canadian oil and gas companies are also suffering, with the added handicap of limited access to global markets. Many companies in the oilsands and the conventional sector have initiated large capital spending and head- count cuts to withstand the severe downturn.
The oilpatch gloom has reverberated across the Canadian economy, with the Bank of Canada warning that “signs of spillovers to other sectors and regions are emerging.”
Tertzakian told a Financial Post editorial board meeting in Toronto he thinks the “structural” changes in the Canadian fossil fuels industry could result in a similar round of merger and acquisition activities.
“It’s not just the right thing to do, but in some instances it is going to be a necessity in order to compete.”
Canadian oil and gas upstream revenues stood at $ 154 billion last year, but that number has dipped to about $ 90 billion, Tertzakian said. The industry’s cash flow has also dried up from a robust $ 69 billion last year to about $ 15 billion currently.
Energy consultant Wood Mackenzie believes the BG- Shell merger could open the “floodgates” for a round of M& A activity.
“Most of the big players — IOCs and NOCs — are weighing up opportunistic acquisitions, but few have the means or appetite for deals anywhere near this scale,” Wood Mackenzie said in a note to clients.
However, most of the majors are hamstrung by near- term financial stretch, and Asian national oil companies are contending with growing political scrutiny of M& A strategy, past and future.
“If you’re looking to the next big deal, Exxon Mobil stands out as most likely to pull the trigger. Companies that are unloved by the market but big in strategic resource themes — U. S. tight oil, East
Companies had got used to $ 100 a barrel, and many need $ 40 to $ 60 to break even so we could see more of these deals.
Africa LNG, deepwater or frontier exploration — will be the focus of their attention. But don’t expect a wave of late ‘ 90s- style consolidation.”
Before the proposed merger with BG, Shell’s balance sheet had the capacity to take on $ 53.8 billion US of additional debt, as of the end of last year, while Exxon Mobil’s debt capacity stood at nearly $ 48 billion, according to a study by Evaluate Energy.
However, it was Malaysia’s Petronas that topped the list of companies with the greatest capacity to take on debt, at $ 69.7 billion.
Analysts see the BG- Shell deal the first of many mega- mergers.
“Will this be the opening shot in a new wave of mega- mergers like the 1990s? Quite a few oil companies are under cost pressure with no sense of the oil price recovering,” said Christian Stadler of Warwick Business School, who once worked for Shell. “Companies had got used to $ 100 a barrel, and many need $ 40 to $ 60 to break even so we could see more of these deals.”
The first quarter saw global merger activity of just over $ 7 billion, a drop of 79 per cent compared with the value in the first quarter of 2014 and a drop of 85 per cent compared to the average value per quarter since the start of 2009, Evaluate Energy data shows.
Even though oil prices are at attractive levels for buyers, the first quarter came too early for many to make opportunistic acquisitions, Evaluate analyst Eoin Coyne said in a report.
“Companies will doubtless feel the squeeze as time goes by and Q2 2015 will inevitably be a time when we see an increase in distressed sales as debt- laden companies have their hands forced by the need to furnish debt.”