DELOITTE O&G: US is MVP of 2018 M&A; Upcoming earnings a litmus test for 2019

Highlights

Upstream

2018 – the year of unrealised potential.

• Global M&A activity saw a renewed caution in 2018, which caused a flat deal value and the lowest count since 2015.
  • Compared to 2017, deal counts fell across the segments, remaining level downstream.
• The U.S. accounted for almost two thirds of the total oil and gas deal count – a record high share. All the top ten oil and gas deals in 2018 involved acquisitions of US assets.
• With deteriorating market conditions on the horizon, caution and closed equity markets will likely continue to shape M&A activity in 2019 with the advantage remaining with well-capitalised buyers.

Promising market conditions fell short in 2018.

• A cautious business environment dampened the flush industry’s potential in 2018.
  • The oil price rally throughout most of 2018 did not translate into a boom in M&A activity.
• While oil majors’ profitability rose to meet and even exceed pre-2014-downturn levels, companies chose to repair balance sheets and reward investors before investing for growth.
• Investors are demanding not just a return on capital, but also a return of capital.

Upstream Permian shale continues to dominate

• Overall, Upstream M&A volume for 2018 was 12% lower than 2017.
• The United States dominated upstream activity, accounting for 66% of the deal share with an US$79.7 billion value in 2018 – an increase of 26% year over year.
• Buyers continued to covet the Permian, which recorded deals worth US$25.7 billion in 2018.
  • These deals primarily focused on driving operational synergies through development optimisation, and capital efficiency through shared infrastructure.
• US royalty deal volume and value reached an all-time high of 29 deals worth US$2.2 billion.

Oilfield Services

OFS showed weak M&A activity due to large bid/ask spreads.

• The OFS deal value in 2018 fell to a five-year low, totalling US$20.6 billion, while the deal count fell to 62.
• The oilfield services price index remained at or even below 2016 levels for most of 2018.
• The deal rationales this year largely revolved around buying to achieve economies of scale in an existing segment rather than making acquisitions to complement or complete service offerings.

Midstream

Increased midstream activity driven by bottlenecks: lack of takeaway capacity and infrastructure.

• Midstream activity was North America-dominated and recorded an uptick in deal value driven by infrastructure bottlenecks.
• MLPs also became more financially attractive in the last quarter of 2018 due to higher business volumes and cash flows.
• Infrastructure bottleneck relief and shrinking price differentials are on the horizon, however falling oil prices may temper production and slow deal flow in 2019.

Downstream

Downstream records the biggest deal of the year and a balanced fourth quarter.

• The increased downstream deal value in 2018 was attributable to a record deal in this segment that topped the list of largest deals in 2018.
  • Marathon Petroleum acquired Andeavor for US$35.6 billion, allowing the independent refiner to become the largest US refiner by capacity and become the largest by market capitalisation.
• The terminal and storage segment is ripe for increased activity as North American industry players seek to grow export markets.

Looking ahead

• Regardless of the price of oil going into 2019, M&A activity will likely remain muted as the return of confidence is delayed and equity markets remain closed.
• Overall, large and liquid oil and gas players will be in the best position to ride the cycle and perhaps take advantage of a likely shift to a buyer’s market. For the rest, consolidation may be key to weathering a period of deepening uncertainty.
• Key Questions/Considerations:
  • Upstream: Will the anticipated US shale production boom will materialise or be undercut by falling prices and/or a demand slump?
  • Midstream: Can players balance their drive to overcome infrastructure bottlenecks with caution about overcapacity risk should production levels dip?
  • Downstream: Will refiners’ record profitability come to an end as bottlenecks disappear and price differentials narrow?
  • OFS companies: Still struggling to regain lost margins, is in the most vulnerable position.

Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/31012019/deloitte-og-us-is-mvp-of-2018-ma-upcoming-earnings-a-litmus-test-for-2019/