The intense pressure created by oil prices falling below $50 is challenging cash flows, to which companies are expected to respond with mergers and acquisitions and reshape the competitive landscape to their advantage, a report said.

Mergers and acquisitions (M&A) in oil and gas (O&G) showed a strong recovery in 2014 after a slow 2013, and with recent oil price decreases and Opec’s decision not to cut output, 2015 is set to witness even further M&A activity across the value chain, explained a new study by A T Kearney, a leading global management consulting firm.

These strategic deals will be key to growing value and aiding companies to navigate market turbulence, Richard Forrest, global lead partner for the Energy Practice and co-author of the Oil & Gas M&A study, A T Kearney.

“Strategic approaches to M&A are critical to address the intense cost and cash-flow pressures experienced by Oil & Gas players. Our analysis and discussions with industry executives revealed the likely onset of a new wave of mergers and acquisitions across the value chain in the next 6 to 12 months.

“The window of opportunity may be shorter than expected and will be driven by oil price expectations. Those companies with strong cash flow and healthy balance sheets will be able to leverage opportunities, while others will need to define strategies just to survive,” Forrest added.

All players in the industry can benefit from a strategic approach to mergers and acquisitions, including international oil companies (IOCs), national oil companies (NOCs), independent oil companies, service sector businesses and financial investors, the report noted.

Jose Alberich, partner, A T Kearney Middle East, said: “For Middle East players, in particular NOCs but also IOCs and oil majors operating in the region, there may be opportunities to strengthen their positions with strategic M&A deals. Attractive assets might struggle with the lower oil prices, and as they become distressed may turn into viable targets for larger players.”

“However, lower oil prices may well mean less cash available to potential buyers, so any moves made will be very selective. All activity will be carefully considered, with NOCs reassessing strategies to ensure proactive moves fit their mandate and government objectives,” he added.

For IOCs, optimizing portfolios will continue to be the focus. Divestment of downstream and non-core assets could accelerate to enable funding of targeted upstream activity and meeting cash flow needs throughout 2015. Mega deals for scale synergy are not out of the question but will be limited, if at all.

The study determines IOCs will favour selective acquisitions to build in their chosen areas. M&A activity for NOCs will be aligned with the national agenda of their host government, which is often strongly influenced by near-term domestic needs and government agendas as much as by economic and business strategies.

The study finds that independent oil companies’ success in M&A will be determined by balance-sheet strength and varying levels of exposure to assets with higher breakeven oil prices. The more adventurous financial investors may take the opportunity to enter the market; however, the current margin squeeze, low oil prices, and sluggish demand could suppress some investors’ appetites.

Financial investors are likely to acquire in the oil-field services sector, downstream divestments by IOCs, and for those with confidence, some upstream assets beyond the traditional mature production.

Oil service companies will continue to be hit hard as operator margins are squeezed and this will also impact service providers. There is significant potential for consolidation and investors with capital to invest will continue to be active, plus new entrants such as large engineering companies could make strategic moves to enter the market.

“Businesses with the foresight to take first-mover advantage can make significant strategic gains in what will be a very dynamic competitive landscape,” Forrest concluded. – TradeArabia News Service