Lower-for-longer view for oil means more deals on the way

*Ernst & Young.

*Ernst & Young.

*Value of M&A shrank by 17% to $380 billion last year, EY says
*Consolidation to be driven by overcapacity, margin pressures

01 February 2016 – Oil and natural-gas acquisitions will increase this year as a collapse in energy prices weakens companies’ finances, forcing them to accept lower valuations from buyers, according to consultants Ernst & Young LLP.

There will be more “motivated sellers and more consensus on valuations in a period of lower-for-longer prices,” EY said Monday in a report.

“Consolidation will be driven by overcapacity, intense margin pressures and generally weaker capital markets.”

The total value of oil and gas deals dropped 17 percent to $380 billion last year while the number of transactions fell by a third, according to the report. When Royal Dutch Shell Plc agreed to snap up BG Group Plc in April in its biggest ever acquisition, some analysts expected a wave of deals to follow, yet oil-price volatility meant buyers and sellers were unable to agree on valuations.

“Deferring transactions until prices return to higher levels and/or become less volatile will no longer be a viable option for many oil and gas companies,” EY wrote. “Transaction volumes should increase in 2016.”

OPEC Strategy
The number of deals in the oilfield services industry dropped 40 percent to 193 last year, according to the report. Transactions in oil and gas exploration and production fell 38 percent to 910.

Oil prices have tumbled since mid-2014 as supply growth outpaced demand. The Organization of Petroleum Exporting Countries, led by the world’s biggest exporter Saudi Arabia, has preferred to continue pumping to defend market share amid increasing output from the U.S. and Russia. Prices fell to the lowest in 12 years last month. Brent crude, the global benchmark, has since recovered to about $34 a barrel.

In terms of value, oilfield-services deals declined about 63 percent in 2015 as oil producers reduced drilling budgets and canceled rig orders, making the service companies less attractive, according to the report. Exploration and production deals, including Shell’s purchase of BG, dropped 19 percent. Refining and oil-marketing transactions rose as assets were sold in the U.S.

“While it is always difficult to call the bottom, the belief in 2015 was that 2016 was going to be more challenging from a price and financing perspective,” EY said. “Looking further forward, one could hope that 2017 will see the beginnings of a recovery — if 2016 is indeed the low-water mark, then a wave of opportunistic transactions, perhaps deferred from 2015, can be anticipated this year.”

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