The Post-Pandemic M&A Landscape in Oil and Gas

The Post-Pandemic M&A Landscape in Oil and Gas

November 30, 2020 | Oil and Gas

The current pandemic-driven global economic depression is unlike previous downturns, which created various opportunities for buyouts and selloffs between various oil and gas players.

There is a general expectation in the oil and gas industry for mergers and acquisitions to increase as many companies have experienced difficulties in managing the post-pandemic situation and operators are looking at opportunities to improve their asset portfolio. According to industry experts, this impetus has emerged as an aftereffect of the pandemic and increased chances to acquire assets at cheap valuations. Similar expectations were set at the time of the demand-supply shock of 1997-98, which led to mega-mergers that created the current supermajor oil and gas companies.

Factors Impacting M&A and the Current Industry Situation

In the wake of the pandemic, a multitude of factors are expected to stimulate mergers and acquisitions. For instance, the valuation measures of numerous companies are at their lowest since 2009, high acquisition premiums are expected to lower and the liquidity of O&G assets are at the stake of sale due to financial stress, which would jointly support increasing M&A activities in the near term.

In the current situation, oil and gas operators are paying more attention to the cost-effectiveness of their investment and operations, along with environmental and social factors, and governance. Companies are moving away from their dependency on hydrocarbons, particularly in western Europe. For instance, Total’s ongoing talks with Adani Renewables and Shell’s 2018 acquisition of First Utilities are some significant industry developments marking the shift toward renewables.

The pandemic and price-crash events have caused huge losses in the industry , forcing players including the likes of Shell, BP and Total, amongst others to reassess their business strategies as the industry prepares for low-price scenarios with assumptions indicating oil prices of less than $60 a barrel.

In addition, industry majors are also looking for avenues to diversify their business and are striving to minimize their dependency on hydrocarbons.

Although there have been some investments in hydrocarbons, companies would not profoundly be interested due to a shift in priorities. Operators are increasingly investing in the clean energy sector. The deal between Chevron and Noble Energy is one such example that had a natural gas component, which is a commodity with a cleaner outlook than oil.

Future Outlook and Considerations for Oil and Gas Players

Oil and gas companies with strong balance sheets and reliable cash flows are expected to be involved in M&A activities in the post-pandemic world wherein interest in unconventional assets operated by small private players can seem lucrative to major operators.

However, certain factors should be taken into the consideration in the post-COVID world. For instance, oil and gas firms should follow sustainable approaches towards business. The previous downturns and the current pandemic suggest that operations should not be executed keeping $100 a barrel in mind.

The pandemic has taught us the importance of having a strong balance sheet. This is especially true for shale reserves which have not been able to generate ample equity but have raised a high amount of debt that is maturing now.

Another consideration is financial discipline in managing the cost of production, associated profits and subsequent investments. Leaders are recommended to integrate caution with an understanding of liquidity, debt profiles and capital structures.

Along with other industries, the oil and gas industry is also going to be careful about risk assessment. Industry players are already concerned over capital discipline and cash generation and will be driven by strategies and structures that can withstand future unprecedented events.

Conclusion

Accommodating aforementioned bottlenecks, mergers and acquisitions deals are anticipated to help oil and gas navigate the current crisis of low prices and the pandemic. Additionally, even though the market appears favorable for M&A activities, oil and gas investors are expected to be extra careful in evaluating their financial conditions, economic stress and the profit-generating potential of the company to be acquired.

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Santosh Nair

Vice President, Technology

Santosh has over 12 years of experience managing large-scale procurement transformation engagements for leading Fortune 500 companies.

At GEP, he’s responsible for developing new products and services by incorporating complex aspects of mobile interfaces, social media, cloud computing and big data.

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