Over $300bn of upstream assets are potentially for sale but transaction volumes have been thin over past 12 months. Sellers have been reluctant to transact at Implied Long Term Oil Prices (ILTOP) below $60 so far – where will the market establish a clearing price?
The last 18 months have seen a dramatic fall in global oil prices from more than $100/bbl to less than $40/bbl.
As oil prices continued to tumble during 2015 and interest in M&A activity increased, Wood Mackenzie launched its inaugural Valuation Survey with clients from companies across the upstream oil and gas industry asked to contribute. Results were collected between September and November 2015 as oil prices continued to slide.
Respondents largely believe 2016 will be the year of renewed deals in the upstream sector with consensus in buyers' and sellers' valuations required to facilitate deals.
Wood Mackenzie believes there is ~US$300bn of potential upstream deals in the pipeline – but due to the misalignment of valuation expectations between buyers and sellers the market is gridlocked. This misalignment is largely driven by differing mid-term price outlooks and a lack of cash-buyers.
Our deal analysis indicated that seller price expectations are already falling with a $10/bbl decline in the average Implied Long Term Oil Price (ILTOP) of deals in 2015 – with consensus building around a "lower for longer" environment will buyers have to significantly reduce the long-term oil price assumptions for valuation to facilitate a stronger flow of divestments? Most companies have reduced their long-term oil price assumptions significantly in light of the recent fall in oil prices.
Our valuation survey indicated between 2014-15 most companies had reduced their long term oil price assumption by more than $20/bbl but analysis of transactions suggests that this is yet to feed into the expectations of sellers in the M&A market. The average ILTOP assumed in a transaction in 2015 was $72/bbl, does this need to drop to $60/bbl (or lower) to establish an active M&A market again?
With an eye to the future, respondents believe a pick up in deal activity with be driven by onshore US deals involving corporates, unconventional oil assets and conventional oil and gas deals.
2016 is expected to be a critical year for upstream M&A activity and as the deal count rises Wood Mackenzie looks forward to assisting clients in their transaction activities.
Wood Mackenzie has advised clients on transactions in all major petroleum provinces globally and across all key resource and investment themes. For more information, please contact our consulting team.
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