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June 14, 2017
Deal-making in a downturn: Why recent energy M&A suggests a more active future
By: Gregg Albert

During the past few years, the energy industry has endured one of the most challenging periods in its history. But as conditions continue to improve, companies that have weathered the downturn could now use mergers and acquisitions (M&A) to redefine their businesses and the industry. In fact, based on our analysis of the past two years of M&A activity and current industry trends, Accenture Strategy sees a brighter day for M&A in the near term across all sectors. 

Upstream

Accenture Strategy has a slightly bullish outlook on upstream M&A. OPEC-led decisions to implement and then maintain 1.8 million barrels in production cuts should provide support for oil prices, although this will be bounded by the incremental Lower-48 production that comes online in 2017 and early 2018. Moderate price volatility with prices in the $50-60 range should continue to make the bid-ask spread for upstream players workable. Furthermore, ample upstream assets of varying quality remain on the market. For many financially healthy companies, buying reserves should continue to be more affordable than finding and developing them, and select upstream players with favorable equity valuations will continue to leverage their equity-purchasing power to strike deals.

Oilfield equipment and services (OFS)

We are also bullish on OFS activity, as rising oil prices eventually encourage OFS companies to pursue more deals. But different factors will influence sell-side and buy-side decision making. Many potential OFS sellers currently believe their market capitalizations are discounted. Unless buyers are willing to pay a significant premium, this will limit deal flow. But as oil prices rise and OFS prices improve, valuations could also improve, closing the bid-ask spread. On the buy side, many potential acquirers’ financial positions must improve before they actively pursue major acquisitions. That will likely take at least a couple of quarters if oil prices continue to rise in 2017.

Midstream

MLPs’ drop-down activity will continue to drive overall midstream activity. But aside from these drop-downs, MLPs will also continue to use M&A as a vehicle for fundamental financial restructuring. Furthermore, upstream players will continue to place midstream assets on the market, just as they did as financial distress roiled the upstream space. On the other hand, M&A activity driven by buyers seeking to secure organic growth prospects is more difficult to predict. But as long as the capital-raising outlook remains sub-optimum, buyers could persist with efforts to seek out attractive organic growth portfolios.

Downstream

Finally, we expect the downstream sector to build on its momentum from the previous few years—for a couple of reasons. Convenience stores should remain the fastest-growing segment in retail, which is good for M&A. Refineries’ crack spreads and margins have been solid through the downturn, which has allowed the industry to improve assets (e.g., updating facilities). Prices for natural gas will remain low, which should continue to help prices—particularly for US refineries, which rely on natural gas for input. And overall, downstream tends to be less volatile than upstream, which should continue to attract buyers.

Want to read more about our perspective on energy M&A? Contact me for our white paper in which we explore in detail why we think the near term will be better for energy M&A than the recent past, where oil and gas companies will likely be placing their bets, and what companies need to do now to prepare to capitalize on promising new opportunities.

To obtain a copy of the full white paper, “Deal-making in a downturn: Why energy M&A of the recent past suggests a more active future”, please contact, Gregg Albert at gregg.albert@accenture.com

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