A hiatus in M&A activity followed in the immediate aftermath of the 2014 price crash, reflecting general uncertainty, a lack of finance-ability and disparity on oil price expectations. The bid-ask spread on deals blew out. Buyers wanted assets at the bottom of the market, but sellers wouldn’t sell then unless they absolutely had to.
This kind of environment always stifles transaction activity. The market won’t get going until a settled consensus emerges on future prices, allowing a ‘fair’ valuation of assets that works for both sides.
The bottom of the market was 2015, when 334 deals were transacted globally – down one-third from the three prior years. Total spend that year was US$55 billion, also the lowest for a decade if Shell’s giant acquisition of BG is excluded.
Activity has picked up – the two subsequent years averaged 400 deals, up 20%. Much of the activity has been in the US, but other regions have also experienced a sharp uptick. Spend recovered to US$128 billion in 2016 and US$143 billion in 2017, close to the annual average for the decade.
The rally in oil prices through 2016 was the spark that lit the fuse. Brent rose from US$30/bbl to over US$50/bbl through the year. A moribund M&A market turned into a feeding frenzy.
Companies were trading assets again, strengthening balance sheets weakened by the downturn, and starting the process of adapting portfolios to lower prices. Consensus on price had emerged: companies were in broad alignment around US$60-70/bbl Brent as the range for completing M&A. The bid/ask transaction spread narrowed, and deals started to flow.