The global oil and gas industry is changing. Demand has shifted east, companies are developing more challenging and higher-cost fields, prices are fluctuating, and the shale revolution has the United States producing more than nine million barrels a day. Winners in this industry confront change head on—anticipating potential outcomes, choosing when to act, and understanding how decisions affect their competitive positions.
The fall in oil prices will trigger a new wave of M&A
Remember in 1998 when oil prices hovered around $20 a barrel and oil companies were flourishing? The severe price drop between then and the 1999 low of $10 a barrel ushered in a wave of mergers to gain economies of scale, creating the super majors of today: Exxon and Mobil in 1998; BP, Amoco, and ARCO in 1998 and 1999; Total, Petrofina, and Elf in 1999 and 2000; and then Chevron and Texaco in 2000.
Fast forward to the three years from 2011 to June 2014 when oil prices found a new level at around $110 per barrel with less volatility—some would say abnormally low—with the odd hiccup caused by geopolitics (see figure 1). The recent plunge in oil prices, prompted by OPEC’s production decision, has triggered what is likely to be a new wave of M&A activity across the entire value chain. Costs have been high, and with the price of oil under $50 a barrel in January 2015—and some betting it could fall below $40—pressure will be intense for industry leaders to have a clear M&A strategy.
Within this context, we performed a study to determine how the market might evolve and what impact market turbulence will have on different groups of companies:
- Independents. Balance-sheet strength and varying levels of exposure to assets with higher breakeven oil prices will determine the winners and losers
- International oil companies (IOCs). Optimized portfolios will continue to be the focus. Divestment of downstream assets could accelerate to fund targeted upstream activities and meet cash flow needs
- National oil companies (NOCs). M&A activity will be aligned with the national agenda of their host governments. Many have the financial strength to play a significant M&A role in 2015.
- Oil service companies. They will continue to be hit hard as operator margins are squeezed and the pain is shared with service providers. There is significant potential for consolidation.
- Financial investors. There is plenty of capital looking to be invested in the industry, but the current margin squeeze, low oil prices, and sluggish demand could suppress some investors’ appetites.
Our findings suggest a business environment that is likely to present some turmoil as well as significant opportunities for those willing and able to adopt contrarian strategies. M&A deals—whether acquiring, partnering, or divesting—will play a big role in shaping businesses to grow value and navigate this new, more turbulent landscape. The winners will be those firms that anticipate potential outcomes, choose how and when to act, and understand how these decisions will impact their positions and competitive dynamics.Request Full Report