Bicyclists ride past Halliburton’s Energy Services Group headquarters in Houston. The world’s second-biggest oilfield services provider this month agreed to buy Baker Hughes for $34.6bn in the biggest takeover of a US energy company in three years.
Bloomberg
Opec’s refusal on Thursday to cut output and slow the drop in oil prices signals opportunities for mergers and acquisitions (M&As)among energy companies. At least if past trends play out.
In 1998, when oil slumped to about $10 a barrel after the Asian financial crisis, the value of mergers and acquisitions surged more than seven times to a combined $376bn in that year and the next, according to data compiled by Bloomberg.
While Brent crude oil in London is trading well above 1998 levels at more than $70 a barrel, it’s dropped 36% into a bear market since June 19, when it reached a year’s high of $115.06 a barrel.
“Increased mergers and acquisitions seems to be the trend in the previous low oil price cycles,” said Duke Suttikulpanich, a Singapore-based oil and gas analyst at Standard Chartered Bank. “We have already seen that recently in the oil services space.”
Halliburton Co, the world’s second-biggest oilfield services provider, this month agreed to buy Baker Hughes for $34.6bn in the biggest takeover of a US energy company in three years.
In Asia, the region that consumes most of the world’s oil, the price plunge may be an opportunity for national oil companies, said Buddhika Piyasena, senior director at Fitch Ratings in Singapore. Oil & Natural Gas Corp, India’s biggest oil producer, has pledged to spend $177bn by 2030 to increase oil output, partly through acquisitions overseas.
“The current scenario provides an opening,” Piyasena said. “So I would expect these companies to take advantage.” Asian state-owned national oil companies such as China National Petroleum Corp, Korea National Oil Corp and Malaysia’s Petroliam Nasional Bhd, are becoming more important in global oil and gas, Bloomberg Intelligence analyst Philipp Chladek, wrote in a report yesterday.
“They are acquiring stakes in the most promising prospects that would previously have been bought by international oil companies, such as BP and Shell,” he said.
Asian oil companies with the biggest cash reserves include PetroChina Co and Japan’s Inpex Corp, according to data compiled by Bloomberg.
Asian nations accounted for 33% of the globe’s crude oil consumption last year, the biggest, followed by North America with 26%, according to BP Plc data. China, Japan, South Korea and India, Asia’s biggest economies, need to import most of their oil.Besides being a consumer, China is also the Asia-Pacific’s biggest oil producer, exposing companies including PetroChina and China Petroleum & Chemical Corp to falling prices. This may slow acquisitions by Chinese state-run companies.
The drop in oil prices this time around has been triggered by rising US output from drilling into shale rock deposits and Opec’s decision to keep pumping to maintain market share against shale rivals.
A similar situation played out in 1998, when Saudi Arabia tried to defend its dominance in the global market from new suppliers in Latin America.
In South America, Opec members Venezuela and Ecuador, and non-member Colombia, have been shipping more to Asia as their traditional market, the US, becomes saturated with shale oil, according to Chinese customs data, the Petroleum Association of Japan and Korea National Oil Corp.
In the most recent oil price crash in 2008 during the global credit crisis, Brent crude plunged 67% in six months to less than $45 a barrel at the end of that year.
Oil and gas deals then slowed as CEOs evaluated the global scale of the economic slump that followed and the climb in debt levels.
Then deals in 2009 and 2010 edged up 1.4% compared with the previous two years, according to data compiled by Bloomberg. They rebounded by 26% during 2011 and 2012 as the world emerged from the crisis.
As oil prices recovered, oil, gas and pipeline mergers and acquisitions fell 14% to $575bn since 2013 compared with the previous two years, according to the data.
The drop in oil prices in 2008 was fast, but then they started moving back up very soon again, said Tony Regan, a consultant at Singapore-based Tri-Zen.
“Thursday, Opec showed it’s willing to get into a price war and that’s an extremely bearish signal,” Regan said. “As of now, there’s only one direction oil is going - down.”