Oil industry could see rush of M&A activity
Biggest risk continues to be financial slump with no end in sight
Shareholders for the British-based BG Group paved the way for the biggest energy merger in more than five years recently when they approved the acquisition of their oil and gas company by Royal Dutch Shell for $50 billion.
When Shell announced plans for the takeover last April, the proposed deal was widely seen as a possible harbinger of mergers and acquisitions across the industry.
But aside from an earlier and still pending bid by oil service provider Halliburton to buy one of its rivals, Baker Hughes, for $35 billion, no such trend has emerged, despite the plunge in oil prices that has taken place over the last 18 months and its devas- tating impact on many companies. Now, that situation is likely to change, according to several recent reports on the outlook for M&A activity in the oil and gas sector in 2016.
Among the new findings is a survey of 100 chief financial officers at U.S. oil and gas exploration and production companies by the professional services firm BDO, which suggests a “fire sale” on distressed companies and assets may be in the works.
The survey, conducted from September through November, found 75% of the CFOs expected M&A activity to increase in 2016, compared to 56% who held a similar view one year earlier.
“CFOs’ prediction that low prices would drive increased M&A activity in 2015 did not quite come to pass as sellers held out hope that the industry would turn around and valuation would increase,” BDO said in a report on the survey. “However, many companies holding onto distressed assets may now be looking to clear them from their balance sheets.”
Forty-nine percent of the CFOs said undervalued assets will be the leading factor for transactions as larger companies and investors zero in on companies trying to shed properties and business units that are expensive to operate.
“The energy sector’s increased pessimism about their ability to access capital and credit may also catalyze deal activity in the months to come,” BDO said. “The percentage of CFOs who feel worse about their companies’ access to capital has more than doubled, from just 20% in 2015 to 45% this year.”
Among other findings, the BDO survey finds the CFOs keeping a close eye on U.S. elections this year, although they are not as concerned about government regulation as they have been in the past.
“Despite the energy sector being among the most regulated in the United States, market turbulence appears to outrank regulatory worries on the list of CFOs concerns,” BDO said.
At a time when the American Petroleum Institute is conducting a major advertising campaign asserting that Washington discourages energy development with excessive oversight of drilling, only 22% of the CFOs said legislative and regulatory changes are the leading obstacles to industry growth. That’s about half the proportion feeling similarly last year and the lowest that figure has been in the study’s history, according to BDO.
“Even concerns about environmental regulation have waned,” BDO said. “About one in five CFOs cite environmental regulatory compliance as their top focus for risk-reduction activities in the coming year, compared to 61% a year ago.”
Of the CFOs reporting project delays over the past year, about one-quarter say the interruptions were caused by federal or state environmental regulations — down from 81% last year.
In short, the biggest risk for oil and gas companies continues to be a financial slump with no end in sight. Other threats pale in comparison.