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September 2010 
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Consolidation And Expansion In The Global Oil And Gas Sector |
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Pauline Renaud, May 2010 |
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M&A activity in the global oil and gas sector is increasing. The main drivers include sell-side pressure, larger oil companies seeking growth, independent companies divesting non-core assets and distressed companies being acquired by healthier rivals to create cost synergies. These consolidation and expansion steps have become essential, as the future for the sector is likely to be very different from what it was a few years ago, with major economies shifting towards renewable energy projects. But this also means that companies will be faced with a greater number of challenges when seeking to comply with legal and regulatory developments. Ultimately though, those potential hurdles are not expected to be a major impediment to deal activity in the oil and gas sector looking ahead.
Almost two years ago, when the global financial crisis started, M&A activity in the oil and gas sector reached a near standstill. Given the sharp decline in commodity prices and liquidity issues, companies were forced to restructure their internal operations, focusing on optimising working capital, minimising costs, monitoring tax positions and managing counterparty risk.
But the impact of the crisis was uneven, with some part of the sector more affected than others. For example, the refining segment faced tremendous pressure. Despite those difficult economic conditions there have been few distressed deals, due to relatively healthy balance sheets, strong hedge positions and a lack of consensus on future commodity prices creating a gap between buyers’ and sellers’ expectations. But as the financial crisis is now easing, companies are starting again to conduct M&A to benefit from near-term opportunities and position themselves for long-term success, according to experts.
This uptick in activity has been particularly obvious over the last six months, for example in the coal seam gas sector in Queensland, Australia, where players fought to buy up reserves and be first to market with their liquefied natural gas projects. “The large national oil companies and domestic majors awash with cash have taken advantage of the financial upheaval by directing their activity to expansion and consolidation of their positions throughout the world,” says Allen C. Barron, P.E., president of Ralph E. Davis Associates, Inc. “Major players are growing their portfolio base with acquisitions and positioning themselves to expand operations into new areas with applications of leading edge technology.” He adds that joint efforts between nationals and majors have provided access for companies into areas difficult to penetrate. As a result, giants have together consolidated their positions in those sub-sectors. Joint ventures have also helped larger independents to survive the downturn after they overextended their positions as they anticipated continued high product prices.
Another key area of focus for majors is to maintain upstream capital expenditures in order to balance short-term delivery, while establishing a platform for sustainable growth. “In the upstream sector, there are two interesting phenomena at the junior explorer level,” says Robert Postema, a partner at Piper Alderman. “Firstly, an increasing trend to seek offshore exploration prospects, either as an end in itself or to balance the risk profile of a domestic portfolio of prospects. Secondly, there has been further fragmentation of the sector from a simple conventional versus coal seam gas prospects dichotomy, to a range of prospects including conventional prospects, coal seam prospects, shale gas prospects, coal gasification prospects and so on.” This fragmentation illustrates one of the several factors that have encouraged M&A activity in the oil and gas sector in recent months, amid the economic recovery.
The drivers are numerous but they fall into distinct categories: the focus on the upstream sector; the continued expansion of national oil companies (NOCs); the perceived future energy needs of China and India; the need for explorers and producers to shore up their reserves; the opportunity to acquire assets at a distressed value; the current plateau in oil prices; and the increasing importance of natural gas. “We are bullish on the long-term demand prospects for natural gas – it is the fuel of choice in a low-carbon world,” highlights Andrew Clyde, a partner at Booz & Company. “Many companies are employing M&A, including joint ventures, to increase their exposure to natural gas. We have seen multiple shale gas partnerships in the US, acquisitions of gas players in Australia and other regions, unconventional gas partnerships in China, and even acquisitions of natural gas reserves by coal producers, utility and power generation companies. We expect these trends to continue.” Regarding oil prices, they are expected to remain stable in the near to medium term, which will encourage players to try and extract incremental value from a particular play, explains Mr Clyde. In the meantime, international oil companies (IOCs) are focusing on the upstream sector, while divesting downstream assets.
Further, national oil companies will continue to play a significant role in M&A activity as they seek to acquire specific capabilities that they can use across their asset bases. This was demonstrated by the acquisition of Arrow Energy by PetroChina (partnering with Shell), which has provided access to coal bed methane capabilities that may later be applied to China’s domestic resource base. “Overall, we expect to continue seeing both ‘offensive’ and ‘defensive’ deals in the sector in the near term,” says Dale Nijoka, global oil & gas leader at Ernst & Young. “For example, we expect to see well-funded and capitalised companies act on opportunities to fill strategic needs, such as big oil investing in unconventional gas and new provinces and the national oil companies acquiring strategic reserves when they become available.” Defensive deals, on the other hand, are expected to focus on asset rationalisation, capital discipline, and asset or investment efficiency. But as financial conditions improve, offensive deals will likely overtake transactions with a defensive approach.
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