Transformational M&A plays
Now may be the time to consider transformational M&A plays, such as the likes of Shell acquiring BG (to grow capabilities in the gas value chain). However, aside from the Shell example we have not seen any major upstream corporate deals. And given concerns around rising debt in a cost constrained world and the risk in executing these deals, we are unlikely to see a repeat of the mega mergers that redefined the sector in the late 1990s and early 2000s. Instead asset deals and bolt on acquisitions are likely to be the order of the day. Going forward, companies will likely favour asset acquisitions that build on existing opportunities and create focused portfolios (allowing optimal management of the asset and associated infrastructure). Smaller bolt on acquisitions that build a specific capability or expand the portfolio footprint in target geographies may also be another trend. Enquest’s purchase of a stake in the Magnus field, BP’s stake in Zohr and Exxon’s decision to grow its portfolio in the Permian all illustrate this point.
We also see an increasing prevalence of strategic alliances as a more cost effective means of achieving mutual benefits. This is already happening in the oilfield services (OFS) sector, where alliances more often than not become a precursor to a merger (the Forsys Subsea joint venture between Technip and FMC being a case in point). More recently, Aker Solutions, DNO and Subsea 7 formed a development alliance in the Norwegian North Sea to provide integrated support to operators. We can envisage these type of partnerships occurring more frequently in the upstream sector outside of OFS. BP recently announced its partnership with Kosmos Energy to develop opportunities in West Africa, marrying the Independent’s exploration skills with the Super Major’s expertise in the gas value chain.
Divestments of non-core assets
Another potential route is for companies to review their portfolios for coherence and consider divestments of non-core assets (which could generate additional cash for the business). Several of the IOCs have announced sizeable divestment programmes which are underway, including Shell (US$30bn) and ConocoPhillips (US$8bn). In addition, for some of the large IOCs, such as the super majors for example, these divestments reflect a rebalancing of portfolios as companies shift their focus to low carbon plays.
The role of National Oil Companies
Perhaps most interestingly there is limited public insight into how many of the National Oil Companies (NOCs) will seek to participate in this wave of M&A. We have seen some initial transactions (such as Kuwait Foreign Petroleum Exploration Company - KUFPEC - acquiring assets from Total in offshore Norway and Shell in Thailand) but not enough deals to indicate how active they will be. To date we have not witnessed the degree of activity once demonstrated by the Asian NOCs (in particular Chinese and Indian) a few years ago. Given many of the countries supporting the NOCs have had their own economies adversely impacted by the oil price downturn, it will be interesting to see how the NOCs respond. The decline in fiscal revenues for Saudi Arabia for example, encouraged the government to pursue an IPO of part of Saudi Aramco and to diversify the kingdom’s economy from over dependence on oil revenues. While the flotation is very much a downstream focus, there is a broader question as to whether IPO vehicles becomes a template for some other NOCs, only time will tell. Moreover, will other NOCs seek to divest non-core assets to raise cash or will they make strategic asset acquisitions? Again one to watch closely.