Oil M&A Seen Picking Up as Further Pain Forces Producers to Sell

  • Deals declined 22% to $143 billion last year, IHS report shows
  • Companies with heavy debt forecast to become more vulnerable

Oil and gas producers should see an increase in deals this year as cheap crude prices and limited funding options force debt-saddled energy companies to sell assets, according to consultant IHS Inc.

An uncertain oil price outlook discouraged M&A last year, with the value of transactions falling 22 percent to $143 billion, despite the boost from Royal Dutch Shell Plc’s agreement to take over BG Group Plc, IHS said in a report on Wednesday. The deal pace will probably pick up as energy companies face further financial pain after a 35 percent drop in Brent prices last year.

“Oil and gas producers with heavy debt burdens and hedges rolling off in 2016 will become increasingly vulnerable,” Christopher Sheehan, director of energy M&A research at IHS, said in the report. “They will either have to dispose of prized assets, face serious restructuring -- including the potential for bankruptcy -- or become takeover targets in 2016.”

The number of deals almost halved in 2015 to the lowest level since 2001 while big, unsolicited takeover bids were rejected, the report showed. Other than the Shell purchase, there were no corporate takeovers exceeding $5 billion, it said. 

Scaled Back

Chinese oil companies spent less than $5 billion on acquisitions for the second straight year, while Asian national oil companies scaled back overseas acquisition spending for the second straight year, according to IHS. Excluding the Shell-BG deal, North America accounted for about 60 percent of global upstream value for the second year.

“The likelihood for wider consolidation in the oil and gas industry will increase in 2016 as producers face further financial pain and will have more constrained financing options due to persistently weak oil prices,” Sheehan said.

National oil companies in Asia will probably resume purchases with PetroChina Co. and Oil & Natural Gas Corp. of India among potential buyers, Sanford C. Bernstein & Co. said in November.

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