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Big Oil Enters Growth Mode

M&A activity in the oil and gas industry picked up last year after three depressed years of underinvestment while the industry fought for its life, and this year the increase in the number of deals should continue, according to Wood Mackenzie. Their size, however, is unlikely to be particularly large, the consultancy believes.

Wood Mac outlines three reasons for the continued improvement in merger and acquisition activity in the upstream sector. These include the effects of higher oil prices, of course, but also a change in perspective on asset retention and the U.S. corporate tax reform.

First, companies simply have more money to spend on acquiring assets conducive to growth this year. With oil prices at three-year highs, producers have more cash in their hands today, and this cash needs using. While its first destination is likely to be to shareholders as per the oil businesses’ vows from last year to start buying back stock, there will probably be enough left to spend on asset acquisitions and mergers.

Second, Wood Mac analysts say, oil companies had a wakeup call with the downturn, and now know that capital is there to be put to good use, and that assets are not all created equal. In other words, the new focus on low-cost, high-quality assets will motivate further asset sales and acquisitions. The consultancy’s M&A Service has listed 394 potential deals worth a combined $217 billion.

Third, the U.S. tax reform is likely to stimulate more M&As despite the initial charges that Big Oil complained it would have to book. The United States is the hottest spot for oil mergers and acquisitions, accounting for 40 percent of last year’s M&A activity in terms of value. Unsurprisingly, the Permian is the most coveted part of the U.S. shale patch. Wood Mac notes here that the U.S. shale oil patch is still fragmented and due for some consolidation, which could begin to take place this year. Related: Qatar LNG Booms Despite Embargo

Most of these deals are likely to be relatively small in size—nothing like Shell’s acquisition of BG Group two years ago is in the pipeline—according to Wood Mac analysts. It makes sense: when Shell bought BG Group for $52 billion three years ago, a lot of people thought this could be the end of Shell as prices plummeted and its debt load rose so much it launched an asset sale program worth $30 billion.

Shell managed to survive, thanks to the long-term view taken by its executive suit and their winning bet on gas, but as excited as other companies may be about the implications of this success, they are unlikely to undertake such a large and possibly risky deal so soon after the price collapse, even if they do have the cash available.

Wood Mac’s analysts are not alone in their belief that there will be more deals this year. Earlier this month, in an interview for Rigzone, the senior vice president of Argo Consulting, Alan Free, said that Big Oil was in growth mode once again, and was willing to spend more on acquisitions than on organic growth from existing properties. The same is true for smaller players and private equity-backed entities, Free noted.

After three years of underinvestment and new discoveries at multi-decade lows, switching on the acquisitive growth mode is the only strategy that really makes sense right now. Getting them while they’re cheap and while there’s cash to put into acquisitions seems to be the motto of the post-crisis oil industry.

By Irina Slav for Oilprice.com

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