Top 5 Strategic Drivers of Oil and Gas M&A

Mergers and acquisitions in the oil and gas industry oscillated from a high of $84.8 billion in the first half of 2012 to just $51.5 billion in the first half of 2013. The total deal value for Q2 2013 was $23.6 billion, the lowest since Q3 2009. Expect a new swing given the rumors that Repsol might be buying between $5 and $10 billion of U.S. oil and gas assets.

The goals of a firm in acquisition mode may be entering new markets, diversifying a firm’s customer base, accessing new technologies, or achieving scale and cost synergies. While these M&A strategies are applicable across all industries, each industry is unique. In light of the roller coaster activity of the oil and gas industry, Capstone has compiled a list of the top five strategic drivers of oil and gas M&A.

1. The Need for Reserves:

The oil and gas industry is dependent on finite natural resources. To remain successful, an O&G company must replenish its reserves of oil by using profits from selling its products.  Dealmaking is an often-used tactic for adding proven reserves of oil and gas to a company’s balance sheet. Large oil companies with high current production values and expertise in developing oil fields can avoid the risks of exploration by buying undeveloped fields that have already been explored by other companies.

2. The Need to Develop Fields:

While larger firms are focused on acquiring reserves, smaller exploration-focused companies may not have the expertise, supplier relationships, or financial resources to turn their proven reserves into a cash-generating asset. Small firms may accept a minority investment from a larger company or sell their reserves to quickly monetize an unproductive asset.

3. Geographic Diversification:

As global commodities, it is commonly understood that oil and gas are the same products everywhere, selling for globally determined prices. While this simplistic view can be used to understand the macroscopic dynamics of the oil & gas industry, in reality the industry is more complex.

The quality of oil and gas produced and the costs necessary to extract resources depend on local geologies. Prices depend on local factors such as proximity to refineries, quality of pipeline and rail infrastructure, and regional supply and demand. A study by Kimmeridge Energy illustrates how geographic factors influence the oil and gas industry in different regions across the United States.

Consequently, a diversified portfolio can minimize risk by spreading it across multiple unrelated revenue streams. The larger a company, the more important geographic diversification becomes. For entrepreneurial small to mid-sized oil companies, acquiring other small companies in different states and countries can be a viable strategy for geographic expansion. An acquisition not only brings in new reserves from a new area, but also the know-how and market relationships of the sellers ─ intangibles that would not be achieved by venturing alone.

4. Acquiring Know-How:

Oil companies have different core competencies. Some companies are better at deepwater drilling, others at horizontal drilling or at deep shale exploration and development. Compared to in-house research and development, acquiring a company that possesses the desired know-how is much quicker and less risky. In fact, the desire for advanced American know-how about unconventional oil resources has been a major driver of foreign investment and M&A in the U.S. oil industry.

5. Taxes & Regulations:

Finally, perceptions about future tax and regulatory policy can drive deals. As we saw in last year, the prospect of higher marginal tax rates in 2013 convinced many investors to close deals in 4Q 2012 that may have been scheduled for 2013.


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  1. Thank you for pointing out that oil companies may not all specialize in the same thing. Gas stations are constantly buying oil and I wonder if they are researching where they are getting the gas from. I would hope they would choose the best company for the area.

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