New wave of M&As set to hit oil and gas this year.
The opportunities exist, according to the firm, as a result of oil prices falling below $50 from Brent's $115 high in late June.
Because the intense pricing pressure challenges cash flows, all oil companies need to have a clear near-term and long-term response to the situation, as they did in the late 1990s when mergers and acquisitions were seized to reshape the competitive landscape to the companies' advantage, AT Kearney.
In 2014, mergers and acquisitions in oil and gas showed a strong recovery after a slow 2013, and with recent oil price decreases and the Organization of the Petroleum Exporting Countries (Opec's) decision not to cut output, AT Kearney predicts 2015 is set to witness even further M&A activity across the oil and gas value chain -- strategic deals that will be key to growing value and aiding companies to navigate market turbulence.
"Strategic approaches to M&A are critical to address the intense cost and cash-flow pressures experienced by oil and gas players. Our analysis and discussions with industry executives revealed the likely onset of a new wave of mergers and acquisitions across the value chain in the next 6 to 12 months," said Richard Forrest, AT Kearney global lead partner for the Energy Practice.
"The window of opportunity may be shorter than expected, and will be driven by oil price expectations. Those companies with strong cash flow and healthy balance sheets will be able to leverage opportunities, while others will need to define strategies just to survive," he added.
The largest deal values and the largest share of deals are expected to be seen in the upstream segment where a focus on improving performance on a $/barrel equivalent basis will dominate, Kearney predicts, and many players, including International Oil Companies (IOC), National Oil Companies (NOC), independent oil companies, service sector businesses and financial investors, will proceed all the way to entire company sales and mergers.
Jose Alberich, partner, AT Kearney Middle East, commented: "For Middle East players, in particular NOCs but also IOCs and oil majors operating in the region, there may be opportunities to strengthen their positions with strategic M&A deals. Attractive assets might struggle with the lower oil prices, and as they become distressed may turn into viable targets for larger players.
"However, lower oil prices may well mean less cash available to potential buyers, so any moves made will be very selective. All activity will be carefully considered, with NOCs reassessing strategies to ensure proactive moves fit their mandate and government objectives," he added.
For IOCs, optimising portfolios will continue to be the focus. Divestment of downstream and non-core assets could accelerate to enable funding of targeted upstream activity and meeting cash flow needs throughout 2015. Mega deals for scale synergy are not out of the question but will be limited, if at all. The study determines IOCs will favour selective acquisitions to build in their chosen areas. M&A activity for NOCs will be aligned with the national agenda of their host government, which is often strongly influenced by near-term domestic needs and government agendas as much as by economic and business strategies.
The study finds that independent oil companies' success in M&A will be determined by balance-sheet strength and varying levels of exposure to assets with higher breakeven oil prices. The more adventurous financial investors may take the opportunity to enter the market; however, the current margin squeeze, low oil prices, and sluggish demand could suppress some investors' appetites. Financial investors are likely to acquire in the oil-field services sector, downstream divestments by IOCs, and some upstream assets beyond the traditional mature production.
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