Debts built up from the ‘shale boom’ and higher marginal costs than non-shale competitors are currently colliding with a reduction in demand from the Coronavirus and the oil war between the Saudis and Russians. The interaction between this situation with the environment has the potential to change the structure of the oil and gas industry. Changes in industry structure require help from M&A services to move forwards which can include restructuring, divestitures, carve-outs, spin-offs, distressed assets, mergers, financial acquisitions, etc.
Strategies will be reevaluated and portfolios will need to be rebalanced, requiring investment and financing activities. Overall, I suspect it will be a time when many businesses will need to change hands in the oil industry. Although energy is also an industry where, on the way up, there are as well strong incentives for companies to engage in M&A transactions.
Motivation on the way up, and while still in the top third of the business cycle include:
• Higher growth companies
• Benefiting from market leadership
• Access to more capacity in talent
• Access technology capabilities and R&D to avoid digital disruption
• More available public and private capital markets
Motivation on the way down, and until coming out the other side of the bottom third include:
• Better value / lower risk
• Opportunity to get market leadership
• Reducing industry capacity / Consolidation
• Get an edge over competition with technology to protect market share
• Debt restructuring and distressed asset purchases
• Interest rate policy stimulus / ZIRP
• More available and motivated talent
As well, there are many more considerations depending on the specific situation.
In a broader sense substitutes such as green energy are improving in their value arguably faster than fossil fuels, bringing down their costs and improving aspects of delivery. However the global demand for energy is increasing rapidly, and the net demand for petroleum and other liquid fuels has an increasing trend from an average of 99.97 million barrels per day in 2018, to 100.75 million barrels per day in 2019. Projections are currently 101.12 million bpd in 2020, and 102.85 bpd in 2021, but may get revised downwards due to the crisis.
However due to overall demand, and a potentially less competitive (more consolidated) market moving forwards, the oil and gas industry could be positioned to be a going concern well into the future.
Reference Barrels Per Day: https://www.eia.gov/outlooks/steo/report/global_oil.php