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Sat 30 Apr 2016 01:12 AM

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Cheap oil to force debt-driven shakeout in energy market

AT Kearney says depressed oil prices will force oil and gas companies in distress to seek scarce buyers

Cheap oil to force debt-driven shakeout in energy market
(Getty Images)

Depressed oil prices will force oil and gas companies in distress to seek scarce buyers in a debt-driven shakeout, according to a new report.

AT Kearney's Oil and Gas M&A Outlook reveals that 2016 will be a pivotal year for all oil and gas companies as they look to complement their aggressive capex and cost reductions with divestitures, mergers, and acquisitions.

It said that companies with weak balance sheets will be forced to offload assets and seek partners to support their cash position as funding options dry up, while companies in a stronger financial position will have the opportunity to capture reserve and merger synergies.

"There will be ample opportunities for potential buyers, and we expect to see a surge in assets and companies up for sale," said Richard Forrest, AT Kearney's global lead partner for the Energy Practice and co-author of the report.

"Despite the drop in oil prices since mid-2014, the low-cost Gulf producers remain largely profitable. However, continued fiscal pressure will push many countries and their national oil companies to focus on internal operational efficiency and economic diversification rather than large-scale international M&A. With the increased focus on value and job creation as well as diversification, new partnership opportunities will arise for international players," added Ada Perniceni, partner, AT Kearney.

In 2015, oil and gas M&A activity was limited with only a few major deals dominating headlines such as Royal Dutch Shell's $81.5 billion acquisition of BG Group.

Total upstream deal value declined by 13 percent while oil field services total deal volume declined 61 percent, the report said.

Recent price volatility has created sharp differences in valuation expectations between buyers and sellers, delaying M&A decisions. Companies are focusing on cash preservation and cost reductions but are quickly exhausting options and now have to dig deeper and structurally change their strategies, AT Kearney added.

"This year will be a pivotal one as cash and liquidity concerns drive a shakeout for those with high costs and debt, the report said. Operators with high debt holdings, especially those relying on reserve-based lending, could see their funding squeezed and credit facilities reduced, triggering them to shed low-performing assets," the report warned.

"There are limited buyers today, but the current situation represents a huge opportunity for those with the financial strength required," said Alvin See, AT Kearney principal and co-author of the report.

"Companies, including selected national oil companies (NOCs), may capitalise on the current climate to secure reserves or expand operations, and financial investors are busily gearing themselves up for deals. Any run-up in oil prices lasting a couple of quarters will likely be met with a flurry of deals."

The report forecasts that geopolitics will have a major impact on M&A activity as fiscal austerity will limit M&A in the Middle East, while in China opportunistic oil and gas M&A will play well into Xi Jinping's "One Belt, One Road" vision.

"The year ahead will require tough decisions and a survival mind-set for many non-competitive operators," said Forrest. "For those willing to think and strategize creatively, 2016 will be transformational for individual companies and the long-term future of the industry."

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