Mergers and acquisitions
Historically low oil prices led to M&A (mergers and acquisitions) within the oil and gas industry in 2015—apart from the falling cash flow as we covered in the last part of the series. The latest surveys from the Wall Street Journal and Ernst & Young suggest that upstream oil and gas M&A activity will increase in 2016 compared to 2015 due to lower oil prices. The mega deal between Shell (RDS.A) and BG group is worth $70 billion. It started in 2015. It might finish the final stages of formalities in 2016. By the value of the deals, 2015 was a good year for M&A activity. However, by the number of the deals, it was the lowest in the last decade, according to Wood McKenzie. In 2015, there were 14 oil and gas M&A deals over $1 billion—compared to 46 oil and gas deals in 2014. So, we could see fireworks in 2016.
M&A could rise despite oil price volatility
Wood McKenzie speculates that M&A activity in oil and gas market will rise in 2016 despite the rise or fall in prices. Between $40 billion and $100 billion of private funds were available for oil and gas M&A in 2015. It wasn’t successful. The money wasn’t spent. So, we could see more M&A activity in 2016 for the right deals.
Uncertainty in the oil market hampers the sustainability of small and medium independent oil and gas companies. So, these companies enter into M&A activity for stability, long-term growth, access to new technology, and better cash flow.
M&A activity during the recession
The above chart shows that the number of deals and deal values have potentially increased ahead of major recessions. If 2016 marks a record year for M&A activity, according to the chart, a recession is possible. However, the superabundance of capital and lower interest rates will continue to push financial managers for better returns over the M&A activity and stressed assets.
US shale oil producers like Continental Resources (CLR), EOG Resources (EOG), Whiting Petroleum (WLL), Devon Energy (DVN), and Apache (APA) will be under pressure in 2016 due to lower oil prices. The roller coaster ride in the oil market also impacts ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the iShares U.S. Oil & Gas Exploration & Production ETF (IEO), the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), and the PowerShares DWA Energy Momentum Portfolio (PXI).