Opportunities amid challenges

Low oil price expected to fuel surge in merger activity

Bob RuddimanLow oil prices are expected to trigger a flurry of mergers and acquisitions as firms capitalise on distressed situations, according to research from international law firm Pinsent Masons.

A survey of 200 senior executives across the oilfield services industry has revealed that despite unprecedented price volatility, 86% of respondents expect a surge of deal activity in the next 12 months. Seventy per cent said they were actively considering an acquisition within the next year.

Almost three quarters (74%) pinpointed expansion of overseas operations as the main driving force behind deal activity, with 70% expecting opportunism around distressed assets to drive deals, while 60% are looking at  technology-driven consolidation. Corporates operating in the offshore technology and equipment segments were seen as the most attractive targets.

Respondents revealed that Singapore, Mexico, Indonesia, China and Nigeria are the most attractive emerging markets with falling valuations and new strategic deal structures presenting lucrative outbound investment opportunities against the backdrop of continued oil price volatility.

In more mature markets, two thirds (67%) of respondents said the UK would be likely to yield opportunity for buyers over the next three years.

Notwithstanding that, the report reveals optimism in the industry with an overwhelming 96% predicting UKCS recovery to ‘peak’ levels of profitability. Almost half (48%) expect the UKCS to rebound within five years, while over a quarter (28%) predict recovery within three years subject to a general improvement in the oil price.

The research found that 83% of respondents have based their five year investment strategy on an oil price range of $60-$80 bpd in the face of the new ‘lower for longer’ consensus across the oil and gas industry.

Global head of energy at Pinsent Masons, Bob Ruddiman (pictured), said: “The new landscape is very different from other downturns. We are in a more complex world where supply and demand and significant geopolitical events conspire with unpredictable consequences. Despite that, it’s encouraging to see a sense of optimism and long-termism in the sector as oilfield services companies seek to find opportunity amid the undoubted challenges.”

David McEwing, a partner in the oil and gas team, said: “Much of the discourse around oil and gas deals has focused on the majors and how they will respond to a more volatile environment. However, it shouldn’t be forgotten that the global oilfield services sector is on course to be worth $144bn by 2020, and is a significant employer and wealth creator.

“What our research shows is an industry on the cusp of transformation. Corporates are clearly looking to build out their international propositions and invest in technology which will maximise efficient recovery. It’s no surprise that the UK stands out in that regard given the industry’s focus on innovation and deep sea exploration – not least when we’re seeing more of those types of projects in Asia.

“There is encouragement to be taken from the optimism surrounding UKCS. There has been discussion in some circles about whether UKCS could ever recover to previous levels of profitability, but an overwhelming majority of those we spoke to see a recovery within 3-5 years, and almost a third think this will happen before then.

“That said, there’s no complacency and boards are clearly focusing hard on their corporate strategies. Yes there’s challenge but for some that means a chance to challenge the status quo in a dynamic market.”

Fergus Ewing TwitterScottish Business Minister Fergus Ewing (right) said: “We welcome the fact that this report indicates optimism in the medium and long term future of the oilfield services sector – despite the challenge of the low price. With 22 billion barrels of oil and gas remaining, there are still many opportunities in the North Sea but maximising them will require a concerted effort from everyone – industry, governments and the new regulator.

“We will continue to stand alongside Scotland’s oil and gas industry, doing all that we can to improve collaboration, cooperation and innovation – creating a more competitive sector as well as further developing its status as a global centre of oil and gas expertise.

“In order to encourage investment and further M&A activity in North Sea operations, we urge the UK Government in their spring budget to bring in a series of tax measures, including clarifying decommissioning liabilities extension of investment allowance regarding OPEX for late life assets and encouragement for exploration to make the UK competitive with Norway.”

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