OIL INDUSTRY M&A
For now it is only a distant rumble, but many oil executives and advisers believe they can hear it coming: a gusher of oil deals that is set to erupt next year.
The crude price slump of the 1990s was responsible for a wave of giant mergers that created most of today's leading western oil groups, including ExxonMobil, Chevron, BP and Total, in the form they are in today. If the latest bout of weakness in oil lasts for any significant time, then we can expect a similar reconfiguration of the industry, if perhaps not on quite such a dramatic scale.
Mergers and acquisitions can create scope for rationalisation and cost-cutting, and give companies access to assets that they would have never been able to develop themselves from scratch. For the large international oil groups, deals can be particularly attractive, offering a way to increase production that can be cheaper and more predictable than high-cost, high-risk exploration in the Arctic or off the coast of Brazil.
Before any storm in energy M&A, however, there is likely to be a period of calm. It has been a busy year for dealmaking in the industry, with the value of transactions announced in the three months to the end of September being the highest for any quarter for 10 years, according to data from IHS Herold, a consultancy.
However, activity is now slowing sharply, according to Stephen Trauber, the global head of energy at Citi, the investment bank, and it is likely to remain subdued for a while.
"We expect 2015 will be an active year for M&A, but that is more likely to be skewed towards the second half of the year," Mr Trauber says.
"Right now there are more buyers than sellers. The volatility in the oil price creates uncertainty over valuations, and no one wants to look foolish by selling out too soon."
Doug Meier of PwC, the accounting firm, agrees that while prices are falling so fast, company management teams and boards will be reluctant to accept the offers that come in. "Sellers' expectations are sticky on the way down," he says. "While the value of their business may be declining, their views of what the business is worth decline at a less rapid rate."
A few deals have reached agreement. After several weeks of fractious talks, Halliburton , the oil services group, managed to persuade the directors of rival Baker Hughes last month to accept a cash and stock bid now worth about $26.5bn. On Tuesday, cash-rich Repsol of Spain agreed to buy Talisman Energy of Canada for $8.3bn.
Elsewhere in the oil industry, however, the problems of agreeing valuations have effectively stymied dealmaking.
Last week Eni of Italy confirmed it was putting on ice its long-term ambition of disposing of its remaining 43 per cent stake in oil services group Saipem . Attempts to rehabilitate Saipem under recently appointed chief executive Umberto Vergine appeared to be working until June, but the cancellation of a key contract earlier this month — the South Stream gas pipeline from Russia to Europe — exacerbated a share price slide that has taken the company's stock from €21 in June to €8.37 on Tuesday.
Other deals have unravelled amid market turbulence. Dragon Oil , the cash-rich explorer with production assets off Turkmenistan, two weeks ago withdrew a £500m approach for Petroceltic International launched in October "in the light of prevailing market conditions".
As the price of oil settles, however, the financial strains on many companies — particularly those exposed to large capital expenditure commitments but with limited cash flows — are expected to result in a flurry of takeover activity.
In the US shale oil industry, where growth has been fuelled by borrowing, Pearce Hammond of Simmons & Co, the investment bank, says "companies that have good assets but that don't have good balance sheets" will likely fall to acquisitions.
Large oil companies are already reviewing potential targets, hoping to use their financial strength to pick up assets and companies at attractive prices.
Robin West of the Center for Strategic and International Studies argues that megamergers of the type that brought BP together with Amoco and Exxon with Mobil at the end of the 1990s are unlikely, because they would face vast organisational challenges, and would create giant companies that would find it difficult to achieve profitable growth. However, takeovers of large second-tier companies are quite possible.
Companies including BG Group and Anadarko Petroleum are widely seen as potential targets, as are those that have activist investors, including Hess and Apache .
Hostile bids are rare in the energy industry, but it is possible that where target companies' managements are resistant to approaches, some would-be buyers will bid anyway.
No one can be sure how long oil prices will remain at these levels, and for bidders this could be a once in a decade opportunity.
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