Oil and gas industry M&A in the near future

This topic contains 8 replies, has 5 voices, and was last updated by  Tanaquil Chantrill 7 months, 2 weeks ago.

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  • #93123

    Oil and gas industry is one which has been very quiet in the last 10 years without any major M&A activities. What is the future of M&As in this space and future of oil & gas industry itself given the electric adoption in the system recently?. My take would be that the industry significance will diminish in the long run but there will be increasing competition in the space in short to medium run. In short to medium run, we can expect to see many M&As taking place.

    #93587

    Silman Ondrej Dia
    Participant

    Hi there,

    In regards to oil & gas M&As activity during the period between January 2018 and January 2019 in the US alone there has been more than 900 deals worth roughly $300 billion as per attached graph.

    In addition looking at some the major transactions in the last 10 years it would seem the sector to be quite active as per some of the following deals:
    ExxonMobil acquisition of XTO Energies for $41 billion in 2010; Royal Dutch Shell’s acquisition of BG Group for $54.billion in 2016; Saudi Aramco acquisition of SABIC for $69 billion in 2019; Kinder Morgan’s acquisition of El Paso Pipeline Partners, Kinder Morgan Energy Partners, and Kinder Morgan Management for $76 billion in 2014.

    Oil & Gas M&A deals in the US, January 2018-2019

    Reference

    Oil & gas M&A deals for January 2019 total $11.64bn in United States

    The biggest ever mergers and acquisitions in the oil and gas industry

    #93697

    Thank you, Silman. I was saying just based on my recollection but did not check the facts. You are right. Looks like we have had quite a few large M&As. Probably it is going through some consolidation exercise to achieve economies.

    Also, I think I can ask you this question. Where are we heading in terms electric car adoption and it’s impact to Oil & Gas industry?. Will electric car take the mainstream or it will be on the sideline for quite sometime (tested) before taking mainstream. I think it will go through testing phase for quite sometime as we do not even know the supply (battery) world if we have to have billion+ electric cars in the world. Oil & Gas will find a sweet spot to stay in the meantime, probably they will get into renewal energy world with their money on hand.

    #93947

    Silman Ondrej Dia
    Participant

    Hi Senthilkumar,

    I believe the auto industry is heading for mainstream electric. Many of the major car manufacturers are shifting their production towards hybrid or electric vehicles. Some like Volvo for instance have pledge to commercialise only electric or hybride vehicle starting this year. In addition in Europe new legislations are being adopted to stop the commercialisation of new thermic vehicles by 2030-2040 time frame depending on the countries.
    For sure as the number of such vehicle increase infrastructure as well as electric power resources would have to be increased by the combination of renewable and nuclear energy. The oil & gas industry have understood this shift and this is why they are diversifying. Total the French oil & gas powerhouse has been recently for instance quite active in M&A activities purchasing stakes in renewal energy, batteries, etc…

    #94042

    Hello Silman,

    I do agree with the plans being put forth by all leading Automakers. But I am wondering how the transition is possible in the next 10 years especially given that oil consumption was very progressive and there were a natural supply and demand spread in the last 100 years. In a way, oil became a sustainable & affordable source in the world, and the extraction & refining was cheaper. When it comes to electric vehicles, more than a renewable source for power, I think battery supply will become critical. Is it possible to achieve that level of supply to 1 billion vehicles in the world?. Will we have a sustainable supply (esp raw input for batteries) in this particular space without huge implication on the price in the next 10-20 years?. I am hoping you may have an insight.

    #94160

    Silman Ondrej Dia
    Participant

    Hi Senthilkumar,

    Indeed battery supply will be pending on raw materials, but this is also true for all other electric devices we currently use such as smartphones, tablets, etc… As with any strategic raw material such as rare earth material mostly produced in China, and cobalt in particular, produced in DRC, making sure of a sustainable supply is challenging. The transition will of course occur step by step, dictated by the market.
    However rare earth material are not so rare… and are more available than one would have thought. The issue is their extraction causes a huge environmental impact and is a rather costly activity but if demand is there and it is expected to grow, then I’m sure solutions will be found.

    #102645

    Ingrid Holbik
    Participant

    Gentlemen

    Very interesting points. Standing back, many disruptors are at play. While oil and gas are essential today; they may be obsolete tomorrow and electric power itself may be replaced by something that is not yet invented or discovered.

    The M&A in energy and not just oil & gas is interesting as the energy industry is looking to diversify because it doesn’t know where the industry is going.

    #108657

    Korath Wright
    Participant

    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

    #108685

    Tanaquil Chantrill
    Participant

    Thanks Korath, these are great points. We are in unprecedented times with the Corona Virus pandemic and the markets continuing to fall and of course the Oil Price War, having an outlook on future M&A activity in Oil and Gas with so many moving parts, is more challenging than ever. One theme that I think will continue to hold true is the majors and large oil and gas companies pushing to become Big Energy companies. In order to execute on this theme, one may see divesting of non-core oil and gas assets and businesses to allow for expanding into lower carbon assets and renewables as part of their portfolio.

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