A look at energy M&A: This isn’t the 1980s

The merger and acquisition atmosphere in the United States is evolving amid a prolonged global oil price slump.

The silver lining will be a leaner, more innovative and better focused industry, once prices rise again. That doesn’t mean there won’t be pain along the way, but this isn’t the 1980s, which devastated the industry and entire cities. This time, we have substantial funds that have been raised, some $85 billion over the past several years, looking to participate in the next investment cycle.

The M&A environment was analyzed during a recent Financial Executives International energy CFO series event, “The Outlook for Energy M&A,” at the Dallas Petroleum Club. It was hosted by the Dallas chapter of FEI.

Besides myself, Patrick Welch, CFO at JP Energy Partners; Kaleb Smith, president of Blackbeard Operating; and Patrick McWilliams, managing director of National Gas Partners; provided insights on the M&A landscape. Tony Banks, director of business development for Hein & Associates, moderated the panel.

Merger and acquisition activity in the oil sector declined markedly in 2015 compared to 2014. There were 179 oilfield deals worth $196 billion in 2015, a decrease from 278 deals worth $304 billion in 2014.

We also had $15 billion of failed deals last year, primarily on the inability to bridge the valuation gap between buyer and seller. In anticipation of a muted recovery in 2016, we believe companies will find a way to get these transactions done as they face shrinking borrowing bases, tight capital markets and lost hedges.

The industry has already made substantial cutbacks in headcount, capacity and overhead and is now searching for innovative ways to lower costs through efficiencies and technologies. Although the bid-ask spread will continue to be an issue this year, we will likely see more creative ways to narrow the gap.

Oilfield services feel different levels of pain

Not all segments of the oilfield services are feeling the same amount of pain. Hit hardest are well services, drilling, procurement and topside processing. Feeling less pain: operational and professional services; environmental and remediation; maintenance services; artificial lift services; petrochemical refining, contracting, maintenance and turnarounds; and downstream retail and wholesale operations.

Unlike the exploration and production segment, the oilfield services segment has been hit particularly hard, given its inability to hedge. This has created an opportunity for M&A in OFS, although buyers have been hesitant to execute in this cycle. We expect that once commodity prices begin to rise, acquirers will become particularly active to assure transaction prices don’t get too high.

Upstream deals slow

This hesitancy is also apparent upstream, where sellers have sought to stave off divestiture by cutting expenses. Buyers have stayed largely on the sidelines to avoid the risks of overpayment, especially in undeveloped and higher risk assets. Lenders have also been unwilling to enforce asset write-downs or loan repayments, which would trigger distressed sales and loan write-offs.  As a result, fewer than expected distressed deals in the upstream segment came to market last year.

This wait-and-see attitude may continue to persist this year, although some companies will be forced to act.


For M&A activity to resume at a reasonable pace, it will take buyers who are patient and have a long-term perspective, plus motivation from sellers who have few other liquidity options. We expect to see competition for the best assets while buyers will be able to dictate the price on less desirable assets.