‘Sustained low oil price could prompt large-scale M&A’

Sustained low oil price could prompt large-scale MAA recent US$69.7bn acquisition by Shell could kick-start a M&A spree if low oil prices persist. (Image source: Atli Harðarson/Flickr)Wood MacKenzie report has announced that a sustained period of low oil prices could trigger large-scale mergers and acquisitions (M&A)

The global energy research and consultancy group said this week that the rapid and aggressive response of oil and gas companies had succeeded in stabilising the sector, with the break-even point on a barrel of crude falling by US$20 to US$72 per barrel.

However, the group claimed that if current prices of US$60 per barrel hold for a sustained period, firms would be forced into making deeper cuts, including the sale of assets.

Wood Mackenzie’s analysis reveals a recent lull in M&A activity, despite 340 potential deals worth over US$300bn on the market.

“Buyer and seller expectations remain far apart, and buyers of material size are limited to the most financially secure,” explained Tom Ellacott, Wood Mackenzie’s head of corporate upstream analysis. “But a buyer’s market in M&A might emerge as companies are forced to sell assets to balance the books. The US$300bn question is: with Shell having made the first move, who will follow?”

Shell revealed earlier this month that it would acquire British gas producer BG Group for US$69.7bn in cash and stock, in a deal expected to be completed within 15 months.

Ellacott added, “Investors will be watching the upcoming Q1 results season for indications of how effective the reaction to oil prices at below US$60 per barrel has been. Companies are facing a choice of paring-back investment or maintaining momentum throughout the cycle, depending on their financial position.

“There is a high degree of optionality regarding planned spend in 2016 and 2017, much of which is discretionary. How companies react to this strategic challenge will affect their production growth and positioning in the future.”

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