Oil and gas companies across the world, and especially in the US, inked a series of new mergers and acquisitions (M&As) last year after one year of moribund deal activities in 2015. As crude oil prices stabilized in a range between $40 and $55 a barrel, companies in the United States and other parts of the world took the opportunity to do upstream oil and gas acquisitions at cheaper valuations. The oil-rich Permian region in Texas (USA) witnessed a spate of M&A activities as the oil and gas industry has been quick to adapt and secure primary drilling sites and buy existing production facilities.

In 2016, a record 385 deals were made in US oil and gas business for a total value of $69 billion, as compared with $32 billion in 285 deals in 2015. The Permian region alone saw deals worth $27 billion, of which deals worth $9 billion were in the Midland sub-basin and $18 billion in the Delaware sub-basin. The other regions which saw oil deals were Marcellus, where there were deals worth $6.7 billion and Oklahoma, with $5.1 billion worth of M&A deal. The largest transaction was merger of two publicly traded E&Ps – Range Resource’s $4.4 billion purchase of Memorial Resource Development. Buyers were looking to increase positions in premium resource business and sellers sought to monetized previous investments as implied value moved up after a long lull in M&A activities.   

Global M&A deals

Apart from the US, even other countries witnessed series of oil deals. M&A deals in Russia made headlines as oil assets were available for cheap there too. The $11 billion acquisition of a 19.5% stake in Rosneft by Glencore and Qatar Investments was one of the biggest oil deals in Russia. Canada M&A activity accounted for another 415.6 billion, topped by Suncor’s $4.5 billion acquisition of Canadian Oil Sands.

Other notable global oil M&A deals were Statoil’s $2.5 billion acquisition of 66% interest in Carcara discovery from Petrobras, ExxonMobil’s $2.5 billion offer for InterOil, Rosneft’s $1.58 billion acquisition of 30% interest in Zohr field from Eni, KazMunayGas for $1.22 billion and BP divesting Norwegian subsidiary to Aker and Det Norske for $1.15 billion. In 2016, the total global midstream M&A transactions were worth $145.7 billion, the second highest in the last six years. Even downstream global oil deals remained steady. The largest transactions were the Rosneft/Trafigura-led consortium’s $12.9 billion acquisition of 98% of Essar Oil, Macquarie led consortium acquiring 61% stake in UK gas distribution business from National Grid for $10.64 billion, and Tesoro’s $6.4 billion purchase of Western Refining. Even in 2015 oil companies were doing mergers like Shell acquired BG for $82 billion, which propelled the global M&A to $116 billion.

Even this year looks promising, as oil prices are still lower than the 10-year average price, which makes acquiring drilling sites much cheaper. Companies are expecting that oil prices will rise in the near future as OPEC countries cut production. Rise in oil prices will help companies to reap gains from the drilling acquisitions done now.

Gas deals in the US

As the US is turning out to be a large exporter of gas, companies are looking to acquire gas sites and production units closer to the Gulf Coast and spur up activities in regions like Haynesville, Barnett and the gas window of the Eagle Ford. Buyers in the US are of the opinion that there will be oil and gas supply shortfall at the end of the decade and whenever assets are cheap, it is better to snap them up.

The recovery in oil prices to $45 per barrel during last year summer had triggered a surge of acquisitions. In the US, deal data by region clearly point out that the recovery last year had been driven by some regions and some in particular like the Permian Basin in western Texas. The Permian is prized for its low-breakeven cost of producing a barrel of oil, leading to a gold rush of sorts which had sent the acreage of oil prices soaring there. The recovery in the US oil deal making was also driven by sales of underdeveloped acreage as opposed to reserves that are already producing. Interestingly, drillers were able to cut capital spending in areas where production was not that economical.

There were deals done in other regions apart from Permian and Marcellus as buyers added land to their existing acreage. More such purchases are likely to happen as companies have a lot of cash in hand. Banks that had lent to the energy sector in the past are still hesitant to lend despite the recovery in oil prices.

Going forward, deal making in the US will expand beyond the white-hot Permian to other prime oil resources including the Eagle Ford and Bakken. In gas, with LNG exports from the US increasing, deals are likely to take place in the Gulf Coast.

How oil M&A deal stake up IN USA

(Total of oil and gas)

YearNo of dealsValue ($bn)

Source: PLS Inc

Oil deals in the Gulf

Keeping the trend of oil M&A deals, Saudi Arabia had bought oil portfolios of American energy assets last year. The state-owned Saudi Aramco is the co-owner with Royal Dutch Shell of Motiva, the largest US refinery. In a deal signed in April last year, Aramco will take full control of Motiva’s assets in a year’s time. Saudi Arabia is not the only country with energy assets in the US and close energy ally, the country’s aggressive oil deals in the US is an indication that Saudi Arabia is expanding its reach in the US for oil. In fact, the US laws allow foreign companies to invest in and purchase US oil assets such as refineries and plants.

Reason for spurt in oil deals

Deal making had hit come to a halt in 2015 after the oil bust as banks tightened lending to distressed drillers and buyers and sellers were cautious of the valuation. However, in 2016 oil prices started to gradually move upwards and companies saw potential in prices going up. In fact, 2016 was year when oil prices started rising on strong economic fundamentals, especially the rise in prices of non-agriculture commodities. So, rising crude prices and easing capital markets have pushed up M&A deals in the oil and gas industry. In 2016, oil deals took place in midstream pipeline and storage sector and downstream refining and marketing space. The real recovery in deal making was led by upstream exploration and production sector, which is into the core activity of finding oil and gas. Deal making was also made possible in large number because the gap had narrowed between what buyers were willing to pay and how much sellers were willing to accept. Moreover, sellers needed cash to pay down debt as private equity firms that bought energy assets had reached the end of their holding periods and looked to divest them.

Future outlook

The year 2017 will also be a promising year for oil M&As. Oil prices account for much of the volatility in M&A deals. When oil prices touched $100 a barrel in 2014, oil M&A deals virtually stopped in 2014 and 2015. Now, two years after OPEC’s attack on oil prices began, both OPEC and non-OPEC countries agreed to cut production beginning January 1, 2017. That is expected to boost oil prices to a reasonable level. One of the most critical components to a healthy deal market is stability in oil prices. The global oil industry has deleveraged and pared debt in the last two years through a host of asset sales. If US President Donald Trump comes out with friendlier regulations, it will help increase oil and gas production in the US. So, as oil prices recover deal markets will provide a significant growth platform for those buyers who were not able to capitalize on last year’s opportunities.

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  • Ashok Bapna says:

    Great Analysis on global oil deal. Brilliant article