According to PWC’s First-quarter 2015 oil & gas industry mergers and acquisitions analysis report, mergers and acquisitions activity in the oil and gas industry stalled in the first quarter of 2015. The large swing in oil prices over the past 10 months has been a major factor in continued low deal volumes with 39 oil and gas deals (valued at over $50 million) representing a total value of $34.5 billion in Q1 2015 as compared to 70 deals with a total value of $103.5 billion for the same period a year earlier. While the number and value of deals in the upstream, oilfield services and downstream segments during the first three months of 2015 either decreased or remained the same as the respective levels in the corresponding period in 2014, midstream deals increased in volume and value by 47% and 398%, respectively.

From a macro perspective, oil and gas M&A transaction activity is typically muted during times of falling oil prices due to a widening bid / ask spread between buyers and sellers. Historical experience supports a pattern of limited M&A activity during a fall in oil prices, but once prices stabilize and the industry adopts the new pricing environment, M&A activity will typically increase to normalized levels. So, despite the slump in M&A activity in the oil and gas industry in the first quarter, the level of activity may rise over the next several months in light of the following:

  • Industry players have begun to adopt the new pricing environment as oil prices have remained relatively stable over the past few months, which provides more certainty to buyers and sellers in negotiating and pricing deals. In fact this has already begun to occur as transaction activity has picked up materially in Q2 2015 highlighted by a couple major transactions (most notably Shell’s $82 billion acquisition of BG).
  • There is a large backlog of transactions that stalled when oil prices started to fall in September 2014, which may be revived, although with different pricing expectations.
  • High domestic and international interest for North American shale opportunities drove the substantial M&A activity seen in 2014 (as noted in a PWC press release) and this interest persists with activity expected to return as prices stabilize.
  • If oil prices remain at current levels for extended periods and as hedges roll off, some companies will face increasing balance sheet issues and distressed company sales are a potential outcome.
  • The private equity sector has a significant amount of capital to deploy in the oil and gas industry. According to a recent Financial Times article, more than $40 billion of private equity funds are earmarked for exploration and production deals. Private equity firms will seek opportunities to acquire assets at reduced prices as distressed sales may begin to increase and as some oil and gas companies attempt to sell off assets in an effort to raise capital and cut costs amidst the pressure of lower oil prices.

It is important to note, however, that any increase in M&A activity is underpinned by a stable or increasing oil price and any drastic fall would likely extend the period of slow oil and gas M&A activity.

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