Low Oil Prices To Trigger Large-Scale M&A, Says Wood Mackenzie

Low oil prices could trigger large-scale M&A, consultancy Wood Mackenzie wrote on Monday, a few days after Royal Dutch Shell’s decision to make an offer for BG Group. The new report also argues that low oil prices pushed companies to cut expenses so that the price required for companies to be cash flow neutral in 2015 has dropped by over $20 per barrel to $72.

"Capital cost cutting has been both rapid and in some cases dramatic. Individual companies have had one, two and sometimes three bites at the cherry, and industry has for the time being settled on a 24% or $126 billion fall year-on-year” Tom Ellacott, Head of Corporate Upstream analysis for Wood Mackenzie, commented in a note released on Monday.

The consultancy added that the strategy depends on the dimension of the company. Majors resorted to cuts and reductions in share buybacks, pushing cash flow break-evens 25% down. Smaller companies focused on cut costs measures. 

‘While stock market performance indicates that investors believe there will be an oil price recovery, Wood Mackenzie says that a period of sustained prices at $60/bbl will need further measures to conserve cash’ the firm wrote, adding that there are 340 potential deals at the moment. 

As said some months ago by Natural Gas Europe, financially distressed companies might have to sell assets to balance the books.