21 April 2015, Lagos – A new analysis by Wood Mackenzie revealed a huge inventory of assets on the global oil and gas market with 340 potential deals worth over $300 billion.
According to the latest report by Wood Mackenzie, there are opportunities for the financially strong, as evidenced by Shell’s $82 billion offer for the acquisition of BG.
Wood Mackenzie however noted that activity has collapsed, with buyer and seller expectations remaining far apart, and buyers of material size limited to the most financially secure.
The report noted that a buyer’s market in Mergers and Acquisition (M&A) might emerge as companies are forced to sell assets to balance the books.
“The $300 billion question is: with Shell having made the first move, who will follow?” the report asked.
The new report also noted that the rapid and aggressive response by oil and gas companies to low oil prices has stabilised the sector with the price required for companies to be cash flow neutral in 2015 dropping by over $20 per barrel to $72 per barrel.
Wood Mackenzie said further cuts in costs would be required to achieve cash flow neutrality if oil prices remain around current levels.
The report said low prices would need deeper cuts and could also trigger large-scale mergers and acquisitions.
For some companies, this will mean selling assets, others may suspend or limit dividend and buyback programmes, the report added.
Head of Corporate Upstream analysis for Wood Mackenzie, Tom Ellacott said capital cost cutting had been both rapid and in some cases dramatic.
“Individual companies have had one, two and sometimes three bites at the cherry, and industry has for the time being settled on a 24 per cent or $126 billion fall year-on-year. Dividends and share buyback programmes have also been targeted, while companies have turned to both the debt and equity markets to boost liquidity,” he said.
“Two peer groups are particularly interesting: for the Majors, cutting or suspending buybacks have been the key levers which have contributed to a 25 per cent reduction in cash flow breakevens. For the smaller North American onshore players, the ability to rapidly dial-back spend has been a key competitive advantage. Some players have cut costs by up to 80 per cent, and these companies join a select group with cash flow breakevens below $60/bbl,” Ellacott added.
While stock market performance indicates that investors believe there will be an oil price recovery, Wood Mackenzie stated that a period of sustained prices at $60 per barrel will need further measures to conserve cash.
According to Ellacott, the first quarter 2015 results will underline how much still need to be done if oil prices do not continue to recover.
“More cuts to dividends and buybacks are likely if $50-60 per barrel prices persist,” he added.
But Ellacott noted that there are opportunities for the financially strong, as evidenced by Shell’s $82 billion offer for BG.
“Investors will be watching the upcoming first-quarter results season for indications of how effective the reaction to oil prices at below $60 per barrel has been. Companies are facing a choice of paring-back investment or maintaining momentum throughout the cycle, depending on their financial position. There is a high degree of optionality regarding planned spend in 2016 and 2017, much of which is discretionary. How companies react to this strategic challenge will affect their production growth and positioning in the future,” Ellacott said.
– This Day