Global Upstream M&A Deal Activity Slows Amidst Extreme Oil Price Volatility

By Mahati K L
March 09, 2020
3 minutes read
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International upstream M&A deal activity is expected to drop to its lowest quarterly level in several years, as the collapse in oil prices has created massive uncertainty in the oil & gas market, leaving potential acquirers and sellers of assets unable to match valuation and pricing expectations. Potential sellers remain reluctant to divest assets in the current highly depressed oil price environment, with several international E&P companies having put recently announced asset sales on the back burner.

The near halving of benchmark oil prices since the beginning of the year was exacerbated further over the past 48 hours by Saudi Arabia’s move to slash its official selling price, triggering an all-out price war to protect its global market share. The Saudi move was in retaliation to Russia’s refusal to cooperate with OPEC on further production cuts to bolster oil prices in the aftermath of the Covid-19 pandemic and its adverse impact on global oil demand.

The first two months of 2020 had already witnessed a sharp drop in the number of announced upstream oil & gas M&A deals globally relative to past years, as operators looked to focus their attention on generating better returns from existing portfolios rather than undertake new projects or chase inorganic growth through acquisitions. According to Finbrook’s Global Upstream Oil & Gas M&A Database, only a handful of significant transactions (above US$100 million) have been announced since the beginning of the year. In early January, UK-based independent E&P player Premier Oil announced that it had entered into an agreement with BP to acquire its interests in the Andrew area and Shearwater assets in the UK’s Central North Sea for US$625 million. Premier Oil also entered into an agreement with Dana Petroleum, a subsidiary of South Korean state-owned KNOC, to acquire an additional 25% interest in licence P1330 (containing the Tolmount gas field) located in the UK’s Southern North Sea for US$191 million plus certain contingent payments. At the end of January, Equinor and Shell entered into an agreement with Schlumberger to jointly acquire its 49% non-operated interest in the Bandurria Sur block in the Neuquén basin in Argentina for US$355 million. North American upstream deal activity during the same period has also virtually dried up, with the only significant transactions announced thus far in 2020 being BCE-Mach III’s agreement with Alta Mesa Resources to acquire its STACK play assets in Oklahoma for US$225 million, and Camber Energy’s proposed merger with Viking Energy Group.

The closing of these and other recently announced transactions could face delay or even termination, as buyers scramble to try and renegotiate acquisition terms agreed to when oil prices were substantially higher just a few months ago. Brent crude prices, which had averaged about US$64 per barrel in 2019, have collapsed by around 45% since the beginning of the year, while WTI crude, which averaged US$57 last year, is now trading down at around US$32 per barrel, a nearly 48% drop since January 1st. Extreme price volatility and deep uncertainty over the timing of any potential recovery in oil prices has also dampened investor and lender appetite for financing deals, as oil demand forecasts and overall growth prospects for the global economy remain very weak in the aftermath of outbreak of the virus.

According to industry analysts, the second and third quarters of this year might see a significant uptick in upstream M&A deal activity, driven by distressed sales and opportunistic deal-making by well-capitalized buyers. Companies that made major corporate or asset acquisitions during 2019 are likely already reeling under the weight of the debt taken on to fund such deals, and are expected to undertake asset sales to deleverage. Stretched balance sheets could also prompt a number of ‘break-up’ or ‘spin-off’ situations, as major international companies look to refocus operations on core geographical areas and divest non-core assets.

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