Evolving market conditions will reshape M&A strategy
Rapidly-evolving market conditions are shaping the M&A outlook in the oil and gas sector. Financial distress and debt restructuring are expected to accelerate consolidation, primarily in the North American upstream and oilfield services sectors. Large and financially strong companies continue to have appetite for strategic deals, including bolt-on acquisitions, and the current crisis will likely provide suitable opportunities. However, uncertainty regarding economic outlook and muted forecasts for oil prices could defer some deals.
Significantly lower valuations will bring buyers to the bargaining table; however, this may not be enough to close deals. Buyers will likely evaluate potential targets more broadly, looking at resilience beyond financial metrics to encompass long-term value and premiums related to carbon risk. Additionally, the bid-ask spread may prove difficult in negotiating deals as long as the uncertainty around demand prevails.
With continued appetite and significant available funds for acquisition, private equity (PE) players will likely be key buyers of oil and gas assets.
For now, the focus should remain on employee and financial well-being
As governments around the world begin to lift some of the drastic measures they’ve taken to slow transmission of COVID-19, oil and gas companies continue to confront multiple challenges: from the health and well-being of employees to disruption in the supply chain, and from working capital shortages to when and how to resume operations. How organizations respond to these challenges will be critical, not only for their business but also for the wider economy and communities.
With events continuing to move quickly and their impact ever-expanding, effective approaches will consider how best to respond to these challenges now, which actions to put in place over the near-term and how to plan for recovery over the long-term.
In the near-term, oil and gas companies expect the pandemic to impact their profitability and margins adversely, pushing liquidity and cash generation to the top of the priority list. Companies have responded quickly to the oil price crash by cutting capex, dividends and share buyback plans. Some players have also had to lay off staff, while others in more distressed positions have filed for bankruptcy. We expect more cuts and bankruptcies to follow.
More than two-thirds of oil and gas respondents are already taking steps to reconfigure their global supply chains, while 39% have taken measures to manage workforce safety and well-being. Seventy percent of oil and gas respondents are also re-evaluating their digital transformation and automation strategies to enhance their cost-cutting and optimization strategies and create new M&A opportunities.
Meanwhile, both buyers and potential sellers of distressed assets will want to move fast to get ahead of consolidation. Companies will also want to protect their revenue streams or explore new ones, such as trading and providing risk management services, that fit with current market conditions.