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Gaurav Agnihotri

Gaurav Agnihotri

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused…

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Asian Financial Sector Hit Hard By Low Oil Prices

Asian Financial Sector Hit Hard By Low Oil Prices

Cheap oil can often be a double edged sword. On the one hand, it has been beneficial for the emerging global economies of India and China, who seized the opportunity to expand their strategic petroleum reserves (SPR), while on the other hand, it has created an economic crisis for energy dependent nations like Russia, Venezuela and Libya.

Gone are the days when oil majors would freely invest billions of dollars in mega projects, as shrinking revenues have created significant cost pressure that needs to be reduced first and foremost. So, at a time when most of the major oil and gas players are shying away from new investments, it was expected that mergers and acquisitions would be the best alternative to increase the market value, reduce operational costs and increase service portfolio. However, much to the dismay of industry experts and market watchdogs, 2015 has been pretty lackluster for mergers and acquisitions. Related: Do Or Die For Mexico’s Neglected Oil Sector

According to reports from PWC, the total number of M&A deals in the U.S.-oil and gas industry for the first quarter of 2015 was lower (both in terms of deal value and volume) than the last quarter of 2014. There were 39 oil and gas deals (with each deal worth more than $50 million) worth a combined total of $34.5 billion in first quarter of 2015.

Out of this, there were only four mega-deals whose values were greater than $1 billion. Shell and Statoil were some of the few global energy players who showed any real inclination towards acquiring new assets. Shell is already in process of acquiring BG group and Statoil is rumored to be targeting US-based driller EOG. Apart from a handful of big deals, the mergers and acquisition market at present looks pretty dull.

Total M&A deal value for US oil and gas industry
Image Source: www.pwc.com

What has Asian bankers so worried?

In Southeast Asia, the situation is even worse, where the recent oil plunge has created several problems for investment bankers. Not only have mergers dropped by more than 45 percent in 2015, acquisitions totaling $43 billion have also been scrapped in the last 12 months. This has led several firms into retrenchment mode. As Nicholas Teo of CMC Markets-Singapore told Bloomberg, “The mood on the street is very dismal, in Southeast Asia, the big companies and tycoons have been sitting on the sidelines.” Several banks have now started to feel the heat of this negative sentiment flowing through the market. Related: Why Has Chinese Spending On Oil Dried Up?

Goldman Sachs has already decided to downsize its Singapore based investment banking team by 30%, with the announcement coming after the bank generated just $17 million in revenues from the region in 2014 as compared to $46 million in 2013.

Recently, CIMB Group Holdings Bhd., Malaysia’s second biggest lender, scrapped a $20 billion merger that would have created the biggest banking group in Malaysia. According to the group, tough economic conditions stemming from low oil prices were the main reason behind their decision. The same applies to Standard Chartered who cut almost 2000 jobs in Asia, 200 of which were in the Southeastern region.

“The ultimate goal of the staff reduction is to reduce US$400 million in costs this year. (We have) been shutting down non-core and under-performing businesses to increase our core businesses' efficiency,” the bank’s Chief Executive Peter Sands said of the cuts.

On the other side, increased interest rates have affected Singapore’s stock market (the region’s biggest stock market) as not a single initial public offering (IPO) worth more than $25 million has taken place in 2015. The increase in the number of dead deals in Southeast Asia highlights the grim effects of oil plunge on investor sentiment.

What does this mean in a broader context?

What we can imply from the drop in the number of deals in the oil and gas sector, with a subsequent knock-on in the financial sector, is that the recent volatility in oil prices has created a wave of uncertainty about the future of the global economy. Related: Forget The Noise: Oil Prices Won’t Crash Again

This will only subside once stability in oil prices returns for an extended period of time. If oil prices remain between $50 and $60 per barrel in the near future, we can expect M&A to pick up globally. If oil prices rally and then maintain a period of stability, investments in “greenfield” (new) oil and gas projects might pick some pace again. However, with Goldman Sachs predicting the oil price to stay around $55 through 2020, a price rebound is not inevitable.

By Gaurav Agnihotri of Oilprice.com

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