M&A in the Oil Industry Trends and Variations by Region and Subsector

Although there may be no direct correlation between oil price and merger and acquisition (M&A) activity in the energy sector, a combination of factors mean the current environment is highly conducive to M&A. However, key drivers are very deal-specific and the situation is likely to vary by region and subsector.

Despite 2013 seeing the lowest levels of M&A activity in the energy sector since the 2008 crisis, activity bounced back strongly in 2014 and continued the upward trend throughout 2015. Global M&A transaction levels in the sector are still dominated by the US, which represents the most mature and sophisticated market, followed by the EMEA and Asia-Pacific regions. However, increasingly it is Chinese and other Asian investors who are making the purchases.

Cash flow and margin pressure on the Exploration and Production (E&P) and Oil Services subsectors in particular are creating distress situations and potentially providing an opportunity for rationalisation. With median E&P firms much smaller than the industry average in terms of assets and a fall-off in exploration severely impacting their cash flows, many smaller firms are primed for acquisition.

However, the key opportunity for financial buyers may lie in the downstream space, where cash flow and margin pressures are more balanced, debt servicing requirements and stable cash flows present a better match for the financial investor model.

Energy security is also a key driver of M&A. China is reliant on imports for around 60% of its needs, while India sources even more of its oil from abroad and countries like Thailand and Malaysia face a similar issue. Their national oil companies, which often boast better credit ratings than private oil (and therefore access to more affordable financing), are likely to take advantage of the ongoingsituation to make strategic acquisitions where the right targets are on offer at the right price. Chinese M&A activity peaked in 2012 and quieted in subsequent years as buyers looked to develop their acquisitions and position the portfolio for growth. However, it is likely to pick up to take advantage of unique opportunities in the current environment.

Overall, with prices low, capital markets healthy and an attractive interest rate environment for investors, the macro picture in 2016 is favourable for a record level of M&A activity.

For a wider view of the oil industry in 2016 read, our article ‘The Outlook for the Global Energy Sector in 2016’, or watch our recent series of webinars which cover trends in the US, EMEA and APAC regions respectively.