Australia: Will 2015 be a stand out year for M&A in the oil and gas industry?

Tough macroeconomic conditions for the oil and gas sector are presenting a dichotomy of opportunities for market participants to drive their own corporate strategies. Those companies that act early have the best chance of success.

Globally, the oil and gas industry is facing the dual head-winds of volatile and difficult capital markets conditions, and a significant fall in the oil price. The former caused in large part by uncertainties regarding the Eurozone economy and slowing growth in China. The latter a result of oversupply, stemming from OPEC's decision to maintain oil production levels despite global output increasing, largely on the back of the US shale boom, and slowing demand among developing economies.

In Australia, both ends of the oil and gas market are feeling the impact. With no evidence of either capital markets or the oil price stabilising any time soon, 2015 could be a tumultuous year with M&A featuring prominently in Australia's oil and gas industry.


Oil majors are already attempting to strengthen their balance sheets as a direct consequence of conditions – focusing on their return on capital by offloading non-core assets and cutting exploration and development budgets.

Discretionary exploration interests and downstream infrastructure assets have been the first candidates for divestment. Selling non-core infrastructure assets, in particular, provides an opportunity for companies to monetise peripheral operations (with valuations that may be dependent more upon production volume than current price movements), without sacrificing potential future exploration upside.

BHP's decision to pull back from unconventional exploration in North America and Shell's decision to sell its Australian downstream business to Vitol both illustrate these strategies in action. Last year also saw the sale of BG Group's QCLNG pipeline to APA.

There have also been rumours that Santos will be the next cab off the rank as it looks to bolster its balance sheet and ward off potential takeover suitors by selling its Gladstone LNG pipeline.


The current market conditions present opportunities for would-be acquirers around the globe, both from within and outside of the oil and gas industry. In Australia, Woodside has sought to fill its impending production gap by acquiring Apache's stake in the Wheatstone and Kitimat LNG projects.

Private equity players, with a greater risk appetite, access to capital and a mid-term investment horizon, are also looking for opportunities to acquire quality assets. Apache is rumoured to have fielded bids from private equity investors for its Australian portfolio of assets. And private equity heavyweights, such as Blackstone, KKR and Apollo, are on the acquisition trail - Blackstone is reportedly raising US$4.5bn for a new energy fund in readiness for new investment opportunities.

Tie ups between larger players in the industry are also on the cards, sparked by Halliburton's US$34bn acquisition of oil-services company Baker Hughes.

And what chance a merger amongst the super majors? Recent speculation of a Shell bid for BP evoking memories of the Exxon/Mobil and BP/Amoco mergers in the late 1990s, when the price of crude dropped to below US$12 a barrel.

On the flip side, while 2015 may be the year of opportunity for those looking to pick up assets, closing deals may prove difficult as oil price uncertainty inevitably creates a buy and sell-side pricing disconnect.


Whilst larger oil and gas companies have the luxury to choose M&A activity to suit their risk profile and investment objectives, smaller oil and gas companies are resorting to M&A as a strategy of survival rather than growth.

Raising money on capital markets has become increasingly difficult for smaller explorers. Other than in the case of the most prospective assets, farm-out opportunities are also drying up - with many larger oil and gas companies reducing their risk profile and reining in exploration expenditure.

With traditional methods of capital raising and funding proving difficult, and work commitments still to fulfil, smaller oil and gas companies are resorting to selling down assets to raise cash. We witnessed this trend last year in Australia as companies such as Carnarvon and Otto monetised their interests in certain strategic assets.

For smaller companies without assets that can be readily monetised, the default solution is to look for merger opportunities. In a wave of consolidation, many juniors are being put under pressure to sell into opportunistic bids by cashed-up buyers or consider mergers as a de-facto capital raising measure. 2014 saw scrip tie-ups proposed between Ambassador/Drillsearch, ELK Petroleum/Metgasco and MEO Australia/Mosman Oil.

Given the high number of oil and gas E&P companies outside the ASX300, it seems inevitable that 2015 will see such companies continue to consolidate to strengthen their balance sheets, increase reserves and improve access to capital.


Despite the tough environment, there are opportunities for players at both ends of the oil and gas spectrum to embark upon successful M&A strategies. The formula is to be proactive in developing a strategy and seize opportunities early, so as to forge your own path through this tumultuous market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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