With slumping oil and stagnant natural gas prices, the market for merger and acquisition (M&A) activity among exploration and production companies would appear to be a good bet. However, many of the biggest companies with the deepest pockets are remaining on the sidelines.
Speaking at the recent IHS CERAWeek conference in Houston, several CEOs expressed doubt about any big consolidation taking place -- for now, at least.
BP plc CEO Bob Dudley, whose company has been rumored for months to be primed for takeover, said the appetite isn't there across the industry. Today's business climate is more like 1986 than it was in 1998, a fruitful time for transactions, he told the audience.
In the mid-1980s, it was about staying alive. The late 1990s were about consolidation, when oil prices had slumped to about $10/bbl.
Exxon and Mobil completed their tie-up in 1999 (see Daily GPI, May 7, 1999). BP also merged with Amoco and Arco at that time (see Daily GPI, April 5, 1999). Total, Petrofina and Elf also consolidated (see Daily GPI, Sept. 14, 1999). Chevron and Texaco announced they would combine shortly thereafter (see Daily GPI, Sept. 10, 2001).
In today's climate, the same forces aren't at work that would lead to "lots of consolidation," Dudley said. "Big is not always seen as beautiful."
ExxonMobil Corp. chief Rex Tillerson said his company always was on the prowl for new opportunities. But there was no rush.
"We will be selective in the opportunities we pursue," Tillerson said. For now, ExxonMobil has a "healthy plate" of projects.
Total SA CEO Patrick Pouyanne, who also was a keynoter at the conference, said he also doesn't see a drive for M&A today. He talked about the subject during a press conference following his speech.
"I see nothing," the Total chief said. "I think these are discussions from either bankers or journalists. I think you're trying to build a story before the story has happened."
Pouyanne said Total is patient in part because most of the assets that could be bought remain too expensive. That includes U.S. onshore properties, he said.
If commodity prices remain low for two years or longer, particularly oil prices, M&A prospects are going to be "easier to maneuver" through the boardrooms.
Statoil ASA's CEO Eldar Saetre noted that he thought everybody was taking a look at what is available today and what might be a prospect tomorrow. However, he also said prices weren't attractive and at this point, Statoil has no inclination to pursue relevant discussions.
Super independent ConocoPhillips has been shedding assets, not looking for anything to bolt on, said CEO Ryan Lance. None of the opportunities are competitive with the Houston producer's current portfolio, he said.
Ernst & Young LLP (EY) estimated total oil and gas deal values in the United States during 1Q2015 fell 74% sequentially and declined by almost one-third year/year. Evaluate Energy also found that reported global transactions in the exploration and production sector fell by more than three-quarters year/year and were off 85% compared to the average value per quarter since the start of 2009 (see Daily GPI, April 15).
There hasn't been much movement to merge or make deals into the second quarter, except the mega transaction between Europe's Royal Dutch Shell plc and BG Group plc in early April (see Daily GPI, April 8). The Shell deal actually might be an outlier, in part because BG has been working to secure a merger partner for more than a year, according to E&P executives.
BMO Capital Markets analysts said in a note M&A activity in North America has been limited to date as potential buyers and sellers debate when to jump in.
"We believe that the uncertain oil price outlook and relatively high valuations could keep buyers on the sidelines for now; however, if oil prices stabilize we anticipate an uptick in M&A activity focused on U.S. oil shale," analysts said. "Setting aside strategic considerations, the cost of 'doing it yourself' has generally been lower than pursuing acquisitions."
BMO noted that North American finding and development costs (F&D) are $16.09/boe while “half cycle” costs are $13.73 versus historical acquisition prices of $15.91.
"Development costs are relatively low" compared to the costs to acquire acreage in many of the North American oil basins, including the Bakken and Montney shales, Permian Basin or Viking formation, "but high relative to acquisition prices" in the Niobrara formation, Eagle Ford Shale and Cardium play.
"Current equity market valuations are higher than trailing acquisition prices, despite the sharp drop in crude oil over the last nine months, with equity markets valuing proved reserves at more than $15/boe compared to the 2014 acquisition price of $13 and three-year average of $10," BMO's team said. "This suggests potential buyers would have to gamble on a return of higher oil prices in order to justify many acquisitions."
According to EY, the U.S. midstream dominated activity in the first quarter, led by Energy Transfer Partners LP's takeover of affiliate Regency Energy Partners LP (see Daily GPI, Jan. 26). The second half of this year looks more promising, said EY's Deborah Byer, the firm's U.S. oil and gas leader.
"While volatile oil prices make it difficult for buyers and sellers to agree on valuation, more companies will likely accept terms based on current pricing in the second half of the year. During this time, cost pressures, portfolio optimization and capital market tightness will likely spur increased acquisition and divestment activity."