For the past week, talk in the local and international energy sector has been dominated by the news of Royal Dutch Shell (Shell) offering US$70 billion for BG. In T&T many people have asked questions about the impact the acquisition will have on the local industry.
BG is the second largest natural gas producer in T&T and a major shareholder in the Atlantic LNG facility. Shell has been in operation in T&T for over 100 years and for many decades as a major operator here in both the upstream, refining and retail sectors.
In recent times, Shell has had a smaller footprint through a lubricant blending facility in Pt Lisas. Shell also holds an interest in Atlantic since 2013, after purchasing Repsol's assets in Atlantic.
Minister of Energy and Energy Affairs, Kevin Ramnarine, previously stated that Shell's acquisition of BG could benefit T&T and some of the advantages of the merger may be the potential access to capital and technology.
This merger, while highly publicised, is not the only one of its kind in the current low price environment. In the ever changing energy sector, the low energy price actually acts as a trigger for energy companies to rethink their strategies and long term goals. Falling share prices, especially for cash strapped companies, often opens up new opportunities for mergers and acquisitions since companies are looking to maximize on economies of scale and to strengthen their portfolios.
The Wall Street Journal (WSJ) predicts that the move by Shell will likely prompt a new wave of energy sector deals. The mega-mergers that characterised the late 1990's were mostly in an attempt to bolster the bigger is better claim while the predicted new wave of mergers will possibly look at efficiency, cost reduction and the divestment of non-core assets/business.
Why did Shell go for BG?
According to the WSJ the rationale looks like this: See table
History also shows that in times of low oil prices there are some significant M&A plays which have led to some mega companies eg, Exxon, Mobil, BP, Amoco, ARCO, Total, Petrofina, Elf, and Chevron, Texaco. These mergers happened between 1998 and 2000 where the price of oil struggled around US$20 per barrel and dropped below $10 per barrel. Since then the prices of oil shot to over US$100 with and peaked between the periods 2011-2014.
The subsequent 50 per cent drop since mid-2014 has mirrored the activity in the 1990s with regards to the resurgence of mergers and acquisitions. AT Kearny points to several questions which may be need to be answered if this scenario is to persist and for history to repeat itself:
1. How long will oil prices remain low before companies adjust to new realities?
2. When is the best time to move and when will the window close?
3. Who has the strength to acquire and who will be acquired?
With that being said, AT Kearny also predicts that in 2015, "we expect many in the industry to be active in M&A as a response to squeeze margins considering continued lower than expected oil prices."
In 2014, most of the large volumes of M&A activity can be attributed to the upstream sector, it does not mean that energy service companies will not see some changes in M&A activity.
In fact, energy service companies in times of low energy prices have been known to merge to capture market share or broaden their service offering similar to the Halliburton and Baker Hughes deal.
In March 2015, there was also an announcement of the beginnings of an acquisition between major energy service companies, Halliburton and Baker Hughes.
Recently, it was announced that Halliburton will begin the sale of some of its fixed assets including cutters and drill bits and logging-while-drilling/measurement-while-drilling business. The move is a part of the acquisition of Baker Hughes due to some overlapping business units. It is forecasted that the sale of these assets will generate approximately US$1.5 billion. This move illustrates the efficiency sought, which can be achieved through the M&A process.
Shell also announced it will make asset sales of up to US$30 billion. They, however, have not indicated which assets are being considered to be sold but anticipates that it will be done between 2016 and 2018; which gives a reasonable time for the deal to be finalised.
During this time of economic uncertainty, energy sector companies are evaluating their current position and their long-term goals.
While many of the projected mergers may happen outside the direct scope of T&T, it is clear that international analysts seem to look forward to a period of increased M&A activities in the world.