Although the industry has experienced a challenging few months, Graham Cunning, partner at independent Scottish accountancy firm Campbell Dallas believes the reduced oil price will prompt new deal opportunities.
As the international oil and gas community digests activity from this year’s Offshore Technology Conference, a key watchpoint will be the next big dealmakers. There is speculation on how much deal activity will emerge following one of most important conferences in the industry’s calendar.
“OTC has always been a key meeting point for dealmakers. As some companies look to take advantage of the changed industry environment, and others struggle to adapt, we can expect deal activity in 2015 to be healthier than some commentators predict” said Graham, who is a corporate finance partner at Campbell Dallas, and advises energy companies with international portfolios.
“Firms are still focusing heavily on cash and costs, particularly in the North Sea where operating expenditure has risen sharply. Many have predicted the remainder of this year will be challenging as companies closely review any unnecessary spending. However, a reduced oil price could encourage stronger corporates to accelerate their planned acquisition programmes, and many are already making unsolicited approaches to selected targets.”
For investors, a firm with a diversified, international customer base will be preferable to another which is dependent on one region alone. Cunning believes that companies which provide their services globally rather than regionally, and which are focused on non-discretionary opex spend, are particularly attractive to potential buyers due to their more robust profit performance.
“Larger corporates will seek to divest non core divisions to free up capital, which will also prompt deal activity. Companies continuously assess which geographies, asset types and areas of the supply chain offer the best opportunities, and even more so in a downturn. Capital allocation is of vital importance for oil and gas companies that have to make long-term investment decisions in a constantly changing market.”
Cunning also expects the oil price to recover later in the year and into 2016. “We’ve seen some renegotiation of deal values since the drop in the oil price, but deal activity hasn’t stopped altogether. An oil price drop can boost market consolidation, with tie ups like Shell and BG allowing companies to build economies of scale, as companies re-examine business strategies. Inevitably there will also be an element of forced M&A for corporates with high gearing on their balance sheets.”
Shell’s recently agreed $70 billion takeover of BG Group, the second biggest deal in the oil sector since 1992, has been a key conversation point for commentators who believe this will prompt further market consolidation. This deal is partly as a result of the strong geographical fit both companies have in Australia and Brazil, while Shell also has a clear interest in BG’s asset base, saying it would able to swell its oil and gas reserves by 25%.
“I think we’ll probably see less gearing used in deal structures in 2015, either due to buyer conservatism or the acquirer’s ability to use cash reserves built up during the “good years” when oil prices were higher”, Cunning concludes.