Management
Unlike what happened during previous oil-price collapses, merger and acquisition (M&A) activity has been limited since prices started to fall in 2014. But the signs are that M&A activity may be building, and oil company management teams should think about which deal strategies they should pursue. The oil-price trend has historically been one of the most important determinants of how value is created in the oil and gas industry, and some M&A strategies that worked in the rising-price environment over the past 15 years may not work in today’s market. This article examines the industry’s M&A performance across cycles back to 1986 and identifies strategies that could help companies create value through the price trough, measured by total returns to shareholders.
Most commodities industries are prone to consolidation during the downside of the cycle, when supply surpluses accumulate, prices fall, and competition heats up. The oil and gas industry is no exception (Fig. 1). In the 1998 to 2000 price trough, more than 25 deals greater than USD 1 billion in value were executed in North America alone, including the BP-Amoco, Exxon-Mobil, and Chevron-Texaco megamergers. In total, this wave of deal making amounted to more than USD 350 billion in just over 2 years. It took another decade to match the same amount of deal volume in North American exploration and production (E&P).
Oil prices are recovering from a 12-year low in January (below USD 30/bbl) but remain well below the levels of most of the past decade. There are signs of rising M&A activity, even though few deals have been executed so far. Over the past year, bidask spreads have been too wide for deals to proceed. However, this could change, given the increasing signs of vulnerability among weaker players in the market.
First, industrywide leverage has risen significantly over the past 3 years, and it is particularly high for independent E&P companies with exposure to US shale production. This group’s leverage has spiked—with debt at nearly 10 times earnings before interest, taxes, depreciation, and amortization—indicating an increasing likelihood of restructuring for the most indebted players. Second, pricing hedges are beginning to come off. As a result, it is possible that there will be oil and gas companies available at distressed prices, either because they are in Chapter 11 (continuing to operate while restructuring their debt) or because their market valuations will sink to such low levels that they could be attractive acquisition candidates, even if the buyer has to reach an agreement with its bondholders as part of the deal.
