Crude oil price slump creates pressure-wave for N. Sea mergers, as half of operators forecast market to rebound

leaking oil barrelThe near-two year slump in crude oil prices is creating a pressure-wave of putative mergers this year among N. Sea oil and gas operators.

Notwithstanding that, the report by the Pinsent Mason legal services firm reveals optimism in the industry with an overwhelming 96% predicting N. Sea recovery to ‘peak’ levels of profitability.

Almost half (48%) expect the North Sea to rebound within five years, while over a quarter (28%) predict recovery within three years subject to a general improvement in oil price.

A survey of 200 senior executives across the oilfield services industry has revealed that 86% of respondents expect a surge of deal activity in the next 12 months amid unprecedented price volatility. 70 % said they were actively considering an acquisition within the next 12 months.

Almost three in four operators (74%)  pinpointed expansion of overseas operations as the main driving force behind deal activity, with 70% expecting opportunism around distressed assets to drive deals and 60% eyeing technology-driven consolidation. Corporates operating in the offshore technology and equipment segments were seen as the most attractive targets.

Respondents revealed that Singapore, Mexico, Indonesia, China and Nigeria are the most attractive emerging markets with falling valuations and new strategic deal structures presenting lucrative investment opportunities against the backdrop of continued oil price volatility.

In more mature markets, two thirds (67%) of respondents said the UK would be likely to yield opportunity for buyers over the next three years.

Bob Ruddiman, Aberdeen-based Head of Energy at Pinsent Masons,  said: “The new landscape is very different from other downturns.

“We are in a more complex world where supply and demand and significant geopolitical events conspire with unpredictable consequences.

“Despite that, it’s encouraging to see a sense of long-termism in the sector as oilfield services companies seek to find opportunity amid the undoubted challenges.”

David McEwing, a Partner in the oil and gas team at Pinsent Masons, added: “Much of the discourse around oil and gas deals has focused on the majors and how they will respond to a more volatile environment. However it shouldn’t be forgotten that the global oilfield services sector is on course to be worth $144 billion by 2020, and is a significant employer and wealth creator.”

“What our research shows is an industry on the cusp of transformation. Corporates are clearly looking to build out their international propositions and invest in technology which will maximise efficient recovery. It’s no surprise that the UK stands out in that regard given the industry’s focus on innovation and deep sea exploration – not least when we’re seeing more of those types of projects in Asia. “

“That said, there’s no complacency and boards are clearly focusing hard on their corporate strategies. Yes there’s challenge but for some that means a chance to challenge the status quo in a dynamic market.”

Philip Barker, partner and head of industrials at Cavendish Corporate Finance, said: ‘In 18 months the price of crude has collapsed by almost 80%, piling pressure on higher cost producers and indirectly on the vast assortment of industrials which supply the industry with services and equipment.

“The decline in the oil price currently shows little sign of imminent reversal as the market looks to remains mired in a supply glut for the short to medium term. Saudi Arabia’s latest protective announcement testifies to the cross-fire among oil suppliers who face a first mover dilemma as they struggle to convince other major producers to cut back supply.

 “This creates incentives towards M&A for all sides as even robust firms may be pushed by the oil rout to divest in order to streamline their portfolio, while others will use this as a stepping stone towards greater volume.

“Alongside recently announced job cuts from Shell/BG, BP and Schlumberger, well capitalised players like Statoil and Det Norske are searching for acquisition opportunities.

These parties will meet in the middle and there are many deals to be made over the industry’s assets, paving the way for an uplift in M&A in 2016.

SNP MSP Mark McDonald (Aberdeen Donside) commented: “This report underlines both the resilience of the North Sea sector and the confidence that industry has for the future.

 “Although both industry and workers face considerable challenges at present, we should be mindful that we have a world-leading skilled workforce and businesses that are capable of adapting to new markets and new conditions.

“We have seen some very encouraging news since the turn of the year, with North Sea production up for the first time in 15 years – but we need to build on that to make sure the industry has a prosperous long-term future.

“The SNP has repeatedly called on the UK government to take sensible steps to support the North Sea industry – particulaly on incentivising exploration and development of new prospects.
“The UK government should listen to the confidence industry has in the future of the North Sea and make 2016 a year of action for oil and gas – instead of continuing to sit on their hands as jobs are at risk.

Pixie Energy

Pixie logo Pixie Energy is an incubator and a facilitator of strategic research and project work, focusing on energy regulation, policy and markets at the local and national level. Find out more about Pixie Energy here.

Local Energy Matters: Scotland

Local Energy Matters: Scotland is a free-to-download brochure with a focus on energy tariffs in the two Scottish electricity distribution regions, as well news on local energy and low-carbon schemes.

Previous editions can be download here.

Scottish energy market overview

You can read an overview of the Scottish energy market here.

Scottish Government energy feed