We expect that upstream M&A activity will increase in 2016, though the shape of that activity will be dictated by oil prices. Should they remain low, balance sheets will become ever more stretched and we expect to see more forced sellers.
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Financing options will be more limited than in 2015. Few companies are safe; while the top tier of IOCs can largely ride out a further year of low prices, the next tier down may have fewer alternatives. Corporate actions will follow, including asset sales.
Despite the gloomy outlook there will always be counter-cyclical buyers willing to bet on an eventual recovery. Major players will be looking toward long term strategic deals, while the more ambitious, better funded small caps will be looking to come out of this downturn ahead of peers. Private equity continues to remain poised for action.
Valuations will soften. Those companies holding out for optimal pricing will be forced into action. We expect the two-tier market to accentuate. There will still be interest and competition for the best assets, while buyers will dictate the price of lower value assets.
Should oil prices recover, M&A activity will pick up quickly. First mover advantage is key – securing deals before competition grows and inflation sets in. At the moment, companies are focused on survival, but this could quickly shift back to growth, in a higher oil price environment.
Oil price volatility is a wildcard in all of this. 2015 showed that a period of 'settled' prices, or a 'smooth' trend in one direction, will allow the bid-ask spread to narrow. But sharp directional changes in price can quickly scupper deals, by swinging the pendulum against either party.
Whichever direction the price moves in, there will be opportunities and vulnerabilities created, and only an elite few are impervious.
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