The news that oil and gas giant Shell made a US$70 billion cash and share offer to acquire UK-based BG Group has prompted talk of more deals involving – or even between – other energy industry giants. Already, talk of deals involving ExxonMobil or BP has surfaced. Could a major announcement be not far behind? But the talk first started a few months ago, when the drop in oil prices became untenable for a number of drilling and oilfield service companies.
Back on 5 December 2014, the Wall Street Journal noted that price troughs in the oil industry often result in mergers and acquisitions. The downturns beginning in the early 1980s and again in the late 1990s led to such activity, with players like Exxon and BP taking turns in the spotlight late in the 20th century, as did Chevron, to ring in the new millennium. And with crude oil prices weakening by the day during 4Q 2014, oilfield-service majors Halliburton and Baker Hughes let their intentions be known, and it seemed only a matter of time before one or another major drilling company would hold a press conference to announce a merger or acquisition.
Two differences between this downturn in crude oil prices and some previous downturns have been the strength of the stock market, and the duration of the crude oil trough. The current oil price slump is about 10 months old – an eternity for heavily leveraged, moderate-sized companies, but historically not long for those who experienced downturns like that seen in the 1980s. As for the stock market, it is currently trading near 18,000, down from the 18,200s occasionally seen in late February and early March, but still historically strong.
Late 2014, UK-based multinational audit and professional services firm Ernst and Young stated, “If the price of oil stays down, you are going to see a consolidation of energy companies because there will be profitability pressures.” The names of the industry giants began coming up more frequently as the slump continued through the 1Q 2014. Finally, early in the 2Q, one of the majors made the announcement many were waiting for; Shell announced their deal with the BG Group.
What’s next? Will other majors try to take advantage of market fundamentals and make their own deals? With benchmark Brent crude oil prices generally in the mid-to upper-$50s/bbl, about half as much as last summer’s high prices near $107/bbl, it will surprise few industry analysts if other deals are in the works.
Eye-opening mergers among oil and gas companies are more likely now than last summer, according to Fortune magazine, because mergers often happen when it is cheaper to buy energy reserves on the market than to drill for them. At the top of the list of likely suspects are ExxonMobil and BP, two industry giants. While it is unlikely that they could make a deal with each other, Bloomberg noted that the 2010 oil spill left BP as one of the cheaper of the major producers when comparing to estimated profits, with an estimated value near the mid-$120s billion, about one-third of ExxonMobil’s worth.
More likely than a deal with one another is a deal between either ExxonMobil or BP and any one of several smaller companies. The drop in oil prices has seen many second-tier companies become more of a bargain for the majors.
Now could be the best time to make a move, however. Successive months on the Brent futures contract show the market is in normal backwardation, with prices gradually rising. The longer they wait, the more costly the acquisition could be.
So, will a large player decide there is no time like the present? Global management consulting firm A.T. Kearner seems to think so. After studying the possible effects of the drop in oil prices a few months ago, A.T. Kearney suggests that mergers and acquisitions in the energy industry will increase significantly in 2015 .
However, the window of opportunity could be shorter than expected, Richard Forrest, A.T. Kearney’s global lead partner, said, and the period available for likely deals continues to be driven by oil price expectations.