Cost pressures and competition expected to encourage mergers and acquisitions, according to AT Kearney
The energy sector is likely to see more mergers and acquisitions (M&A) activity due to sub-$50 oil prices, according to a study by AT Kearney.
The oilfield-services industry could consolidate as falling oil prices force energy companies to cut capital expenditure or focus on small-ticket projects, the consultancy firm said.
The study ‘Mergers and Acquisitions in Oil and Gas’ noted that Brent prices have fallen by more than 50% from their stable range of $100-$110 per barrel for the three years leading to June 2014.
Lower oil prices create cost and cash-flow pressures in the industry, with service companies under pressure to offer lower rates, amid lower utilisation of rigs, vessels and crews.
Data released by global oilfield services player Baker Hughes showed that the US oil rig count dropped to a three-year low of 1,223 as of January 30, 2015.
As projects are delayed or cancelled, oilfield service companies are having to deal with lower asset utilisation, which impacts their cost efficiencies.
Small firms account for 60% of the oilfield services sector, while the just three companies account for the rest.
Top-level consolidation is already taking place, with Halliburton having announced a $34.6 billion acquisition of Baker Hughes in November.
The AT Kearney report suggests that oilfield services firms with cash flow or funding difficulties will be the main target of acquisitions.
Non-traditional industry players like private equity firms are already active in the M&A market, where they accounted for 21% of $72bn worth deals sealed in 2014.
A key deal of 2014 had Middle Eastern origins as Qatar-based Al Mirqab Capital’s acquired the London-listed Heritage Oil for $1.5bn.
Jose Alberich, Partner, AT Kearney Middle East, commented: “For Middle East players… 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.”
Regional oil service providers like AlMansoori Engineering prefer a more cautious approach, however.
As the firm’s deputy CEO Ibrahim Al-Alawi notes, “For us, an acquisition is always a strategic decision not a commercial one. Being a private company with limited resources, we have to think twice before we spend money. We don’t want to buy a company just to make money from it. When we acquire companies, it is to gain technology or some other value add.”