Following the trials and tribulations of the financial crisis and the immediate post-crisis global economy, mergers & acquisitions activity, for a few years at least, was fairly moribund.
Activity began to rebound significantly in 2014 and this momentum continued into 2015. According to data released in Q3 2015, over $3 trillion worth of deals were completed last year, spread across a range of industries. Q3 alone saw more than $1 trillion worth of deals. One of the most significant sectors for deal activity in 2015 was, perhaps surprisingly, the energy space.
The energy sector has endured a tempestuous couple of years. Since the second half of 2014, sharp drops in oil prices have strained the operations of many firms operating in the sector. Oil prices have fallen around 60 percent since early 2014, and companies focused on both renewable and traditional energy have fallen victim to the rapidly shifting sands. Chapter 11 filings and insolvencies have increased.
Against this backdrop, M&A in the industry has been fairly prevalent. Although deal activity in 2015 was down year on year compared with 2014, volumes remained significant. The first nine months of the year saw $323bn in announced oil & gas mergers, according to Dealogic. Furthermore, oil & gas was the third-most-active sector for M&A in 2015, and helped drive overall announced deal volume to more than $3.2 trillion worldwide at the time of writing. Accordingly 2015, after the first three quarters of the year, was on pace to roughly match the record of $4.3 trillion set in 2007.
The US was the most targeted nation for oil & gas M&A in 2015, according to Dealogic, accounting for $159.6bn worth of deals in the first three quarters of last year. With many private equity firms, including the Carlyle Group and Blackstone raising multibillion dollar funds aimed at completing deals in the space, 2016 could see a continuation of activity. Many PE investors are looking to the North Sea acquisitions, particularly since the UK announced considerable cuts to taxes on industry profits. Thanks to those cuts, the UK was the second most targeted nation for oil & gas M&A last year, accounting for deals worth a total of $86.6bn.
One of the most striking features of 2015’s resurgence in energy transactions has been the return of the mega merger. Though the financial crisis had seemingly banished the mega merger from the corporate agenda, they have re-emerged in recent years, and the energy space has seen its fair share of late. A handful of transactions valued at $10bn and above have played a significant role in boosting deal volume, such as Energy Transfer Equity LP’s $32.6bn acquisition of pipeline operator Williams Cos, the year’s 10th largest deal overall and one of the largest in the energy space. Schlumberger Ltd, the world’s largest oilfield service company, announced in August that it had agreed a deal for rival Cameron International Corp for $12.7bn. One of the largest deals of 2015 in any industry was the $70bn acquisition of BG Group PLC by Royal Dutch Shell.
Many of the deals in the energy space have been agreed with the state of the market in mind, and synergies have played a key role in driving activity. A strategic mindset has led many companies to pursue M&A, often at a considerable premium, due to potentially significant synergies. Industry giants have benefited from an overabundance of capital on their balances sheets, and are well placed to take calculated gambles. Strong equity markets and cheap debt have also helped.
At times of significant industry stress there is a willingness among bullish firms to ‘get bigger’. The notion that bigger companies will be able to outperform and outlast their smaller rivals when times are tough is longstanding and may explain the significant increase in large M&A deals in the energy sector. With further volatility likely in the months ahead, it seems likely that we will continue to see firms pursuing deals for growth.
Midstream activity has also been considerable over the past two years. Midstream players have attempted to shield themselves from the headwinds of falling commodity prices, and pursued deals they might not otherwise have considered. According to PwC, dealmaking among companies that process, store and transport oil and gas reached $63.5bn in the third quarter of 2015, a figure which represents more than two-thirds of M&A activity in the US energy sector. Out of seven $1bn energy transactions recorded in Q3, four were in the midstream segment. Such companies have been particularly popular with acquirers, as they can be a good platform to gamble on the rise of drilling in North America without the burden of commodity price risk.
Though deal values increased steadily throughout 2015, the number of completed deals fell. Uncertainty around the price of oil has created a schism between buyers afraid of further declines and sellers mindful of the prospect of a sharp recovery. Volatility will continue to raise challenges for energy companies, although the sector should remain a fertile deal environment in the months ahead.
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