Permanently Lower Oil Prices and Sector Consolidation Drive Energy Deals
More oil price stability and significant internal restructuring of the sector are the key drivers leading a recovery in energy M&A with a peak in 2018, according to a new forecast by Baker McKenzie.
The Firm's Global Transactions Report, in association with Oxford Economics, predicts a strong turnaround for energy M&A, although short-lived. The industry is expected to see a rise in M&A from the sharp drop in 2016 of US$164 billion to a peak in 2018 of US$222 billion.
Chair of Baker McKenzie’s Global Energy, Mining & Infrastructure Practice Jim O’Brien explains,
"Looking ahead, we expect the new normal for oil prices to strengthen the case for cost synergies, to be a key driver of energy M&A, as it has in recent decades, and to be an incentive for deal making. Counterbalancing this incentive is the reality that revenues will be substantially lower, undermining the financial case for deals."
Forecast: mixed prospects for deals
- In North America and Asia Pacific, consolidation within the energy and raw materials sectors should continue to generate transactions in the coming years.
- A gradual recovery in oil prices will create greater economic and financial certainty in commodity-exporting economies, particularly in emerging markets. We forecast that oil prices will remain below US$60 per barrel until late 2019.
- In US and Canada, the growing presence of small-scale oil producers will make consolidation costlier and less efficient than previous mergers involving oil majors.
- China’s shift from commodity to services sector investments could also dampen energy transactions.
- Ambitious global emissions reduction targets, such as those in the Paris Agreement, could also cause global demand for energy to fall more rapidly, making energy companies wary of pursuing scale.
- Saudi oil giant Aramco, could also list in 2017 in what would be the biggest IPO in history. Saudi Arabia plans to modernise and diversify its economy.
Source: Baker McKenzie and Oxford Economics