The darkest hour is just before the dawn

The first quarter may prove to have been the darkest hour for global mergers and acquisitions (M&A) activity, with the total reported deal value falling by more than 70pc compared with October-December, according to UK consultancy EY. “Uncertainty about where oil prices will land after their months-long slide has dramatically disrupted the global market for oil and gas M&A activity”, says EY global oil and gas transaction leader Andy Brogan.

Growth was driving the strategic agenda for oil and gas companies for years, but now the focus is on portfolio optimisation, cost cutting and risk profile management, Brogan says. “Only the US midstream, fed by the huge infrastructure requirements of the ‘shale revolution’, remains a hot spot in an otherwise lacklustre deal market.”

The oil price drop has hit hard firms with weaker balance sheets, but it has given more resilient companies a chance to acquire assets or competitors at more attractive prices. And, with oil prices stabilising recently, qualified optimism about prospects for the global economy, and more oil and gas assets coming on the market, the dawn for global M&A activity may be just over the horizon.

More than half of oil and gas companies are now contemplating acquisitions in the next 12 months, EY says in its Global Capital Confidence Barometer survey. The number of executives expecting their companies to “actively pursue acquisitions” — 56pc — has more than doubled since last October.

But, of the companies that are looking to make deals, 72pc are planning acquisitions of no more than $250mn, rather than mega-mergers on the £47bn ($71bn) Shell-BG scale. Only 4pc are looking at potential deals greater than $1bn, according to EY.

While keeping their eyes open, other oil and gas majors are not in a rush to follow in the footsteps of Shell. Total chief executive Patrick Pouyanne said last month: “We have big organic growth. We do not need to make M&A activity.” But he added that if oil prices remain low for quite a long period, “good opportunities” might open up for Total, although he did not quantify a time period or what qualifies as a low oil price.

BP is interested in deepening “the existing asset positions that we have”, and is “certainly not looking at corporate acquisitions at this point”, says chief financial officer Brian Gilvary.

And Exxon’s vice-president of investor relations Jeffrey Woodbury says the company keeps “very alert” to acquisition opportunities. “That may be bolt-on acquisitions, as I said in the past, that provide natural synergies to existing operations that we can capture incremental value from, or larger acquisitions that fundamentally will provide strategic value for us in the long term,” he says.

A rare big deal — Spanish oil and gas firm Repsol buying Canadian upstream company Talisman for a total of $13bn — completes this week. “We like to think at Talisman that we were the catalyst that triggered the Shell-BG deal, but we might be punching a bit above our weight” in taking credit for that, Talisman executive vice president Robert Rooney said last month.

Repsol’s move, which was announced in December, had been in the making since before oil prices peaked in the middle of last year. After building up liquidity from its compensation for the nationalisation of its Argentinian unit YPF in 2012 and the sale of its midstream LNG business, the company was looking to buy assets in developed economies. The deal with Talisman makes it a more diversified company with “a lower level of geopolitical exposure”, according to Repsol chief executive Josu Jon Imaz.

The current lower oil price environment makes deal-hungry firms “more focused on identifying companies that have a more strategic fit or will help reduce costs”, EY says. Shell’s deal with BG will enhance its production through access to BG’s deepwater Brazilian and LNG Australian assets.

And Shell is brushing off concerns that it will struggle to integrate BG because of lack of experience of such acquisitions. “While it is a big deal financially, it is only 5,000 people and a relatively small number of major activities” at BG, says Shell chief financial officer Simon Henry. “It is not that big. In the not that distant past we acquired the part of Shell Canada we did not already own, and in some sense that was just as big a challenge in integration – more people involved, for example”.

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