Grow: falling asset prices fuel M&A


With oil at US$30/bbl, most companies are cutting spend and focusing on survival. But there are financially stronger companies out there. For those confident in a return to higher prices, Warren Buffet’s adage of being greedy when others are fearful suggests that golden opportunities will emerge.

This includes low cost, high impact acreage capture, a new wave of world-class Discovered Resource Opportunities (DROs) and of course M&A. Those companies that are strong enough - and bold enough - to seize the moment could deliver material value creation over the long term.

The M&A market: prey versus predators

In 2015, deal flow collapsed as uncertainty over oil prices created a chasm between what buyers were willing to pay in deals, and what sellers hoped to achieve.  As outlined in our Upstream M&A 2016 outlook, we expect this to change in 2016. Financial distress at US$30/oil will force more companies to sell assets. In 2015, selling assets was often the last option on the table. Increasingly, it’ll become the only option left. Forced sales and a lack of buyers will push asset prices down. This is bad news for those looking to free-up capital just to survive, but an opportunity for the few who are looking to grow.

Discovered Resource Opportunities

There are other resource capture strategies beyond M&A which might compete for growth capital. DROs are situations where there is negotiation with host governments to access opportunities; at the moment, opportunities abound. Last year, Mexico began opening its doors to international investors. Next up, Iran, with sanctions lifted and international exports ramping up. Financially strong Majors and NOCs are best placed to think about growth in these turbulent times, and both Mexico and Iran offer the materiality required to attract these companies’ attention as they seek new long-term growth options.

Reloading the exploration portfolio

Exploration is the primary organic growth engine of the upstream industry, but at US$30/bbl it’s seen as a dispensable luxury. Those that continue with exploration are taking less risks and focusing on shorter-term gains. There are various reasons, but spiralling development costs have been a key factor – full cycle exploration returns plummeted to single digits in 2013. The outlook for the upstream sector is currently bleak.

Now is the time to capture new exploration acreage with few firm commitments and minimal costs of entry. We expect that future cost reductions across the industry, already evident in much lower rig rates, will revitalise full cycle exploration returns. Better fiscal terms will help in many basins. For companies who are able to take a long-term perspective on their business, it has never been easier to secure the exploration opportunities of the future.

Oil price, Implied Long Term Oil Price and deal activity

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