Capital discipline trend in M&A activity in the oil and gas industry

GlobalData Energy 4 February 2020 (Last Updated February 4th, 2020 11:07)
Capital discipline trend in M&A activity in the oil and gas industry

GlobalData’s latest thematic report, ‘M&A in Oil and Gas – 2020’ suggests that in 2019, deal activity in the global oil and gas industry was largely driven by the need to carry out portfolio optimisation, debt reduction and restructuring of operations to drive profitability.

During the oil price downturn of 2014–2017, many exploration and production (E&P) companies were able to receive refinancing from investors for about six to seven years amid hopes of price recovery. However, oil prices have not risen sufficiently enough while the debt raised by operators is nearing its repayment period in the next two years.

This is raising alarms across the global oil and gas industry and influencing deal activity. Many companies are starting to show capital prudence and are resisting making rash acquisitions. However, this strategy can create acquisition opportunities for other companies, albeit at a higher premium, as evidenced during Occidental’s acquisition of Anadarko Petroleum.

Portfolio optimisation by companies resulted in some major mergers and acquisitions (M&A) transactions across different sectors in 2019. In one of the high-value deals of the last year, ExxonMobil agreed to sell its Norwegian oil and gas assets to Var Energi for a total consideration of $4.5 billion and thus announced its exit from Norway.

In another deal, ConocoPhillips completed the sale of its assets from the UK section of the North Sea to Chrysaor Holdings for $2.7 billion. ExxonMobil and ConocoPhillips were on the selling side in Australia as well. While ConocoPhillips sold its operations in Northern Australia to Santos, ExxonMobil is in search of a buyer for its stake in the Bass Strait oil and gas assets in Gippsland Basin.

Environmental concerns and stricter norms imposed by authorities also played a crucial role in deal-making in 2019. As a result, in 2019, the oil and gas industry has observed some of the large divestment plans announced by the oil majors across the regions.

Oil and gas giant BP announced to sell its entire business in Alaska to Hilcorp Energy for a total consideration of $5.6 billion. The deal included the sale of BP’s upstream portfolio of Prudhoe Bay oil fields in the Alaska North Slope and associated midstream assets in the region. The divestment is likely to help BP in reducing its net methane emissions from global operations.

In the figure included, we highlight some of the companies that may be acquired or considering to divest an asset, the potential acquirers and the themes that are driving these M&A transactions.