Oil Price Now 'in Sweet Spot for M&A': Conference
Oil prices are now in the range needed to trigger industry takeovers, delegates heard at a conference in London December 4, as speakers quoted words of from past industry CEOs Christophe de Margerie of French Total and Eni's Paolo Scaroni.
The two European CEOs had reportedly said that the sweet spot was around the $60-65/barrel mark: this seems to reflect the market place, as this year has seen a recovery both in the oil price and in the takeover market.
On the other hand, this could be a circular argument: one speaker said that as long as the market was seen as stable, then deals can go ahead, the actual price being unimportant as long as the market has rebalanced. That could happen at $45/barrel, said one of the panellists speaking at the event under the Chatham House Rule which forbids the identification of speakers but not the reporting of their views.
As it is, the market is discounted further out; so buyers need to have a conviction that the Brent crude market would turn out higher up than the present curve, some speakers said. That would partly explain the longer-term view that buyers were taking of deals: now they are not looking to make a fast buck, but are looking at longer term deals and partnerships. One phrase that was repeated was 'capital stamina', referring to the ability to keep waiting for a better price later.
But the outlook is now a lot brighter than it was in the half year after the Brent price crashed, when the future of some mature provinces was in doubt and decommissioning appeared a lot nearer than it had when oil was above $100/barrel. In those days the gap between buyers and sellers was almost unbridgeable. The boom of H2 2013-H2 2014 saw $300bn in transactions; the slump year after that, namely 2015, saw $199bn, with the exclusion of the outlying Shell takeover of BG and with the biggest drop seen in the Americas while intra-Asian dealmaking continued. Then after that came the recovery with almost $290bn done in 2016, inclusive of transactions done in the Americas that were back at their boom level of $182bn.
Every deal in some senses is unique as assets on sale vary so much in terms of age, production, prospectivity, cost and value to either side, and so on. Some buyers need shareholder approval; some are cash-rich and only go to raise financing after the deal is done, such as through a reserves-based loan, as a way to return cash to shareholders. Others need the oil and gas as physical commodities for feedstock or for operational purposes and are also heavy traders.
And companies have different attitudes as well – or at least the negotiating teams representing the assets do: those in the US are apparently more unconcerned about selling their cashing in and re-entering the market through another entity later on, than some of their European counterparts, unless the company is pushing in a new direction. Dong, Engie, and Maersk are all looking at exiting the upstream, for example.