Three Emerging Industry Trends in Oil & Gas That Could Drive Growth in M&A After Slow Down in 2Q18

Signs of More Consolidation in Upstream Oil & Gas Amid Growing M&A Activity

Oil & Gas Ready to Outperform as a New Oil Up-Cycle Begins

LNG, Oil & Gas, M&A Market Intelligence Specialist

Massimo Bellino

Thematic (Sector/Industry)

Brazil Oil, gas and consumable fuels / Thematic (Sector/Industry)

<p><strong>A wave of summer M&amp;A. </strong>After three months of subdued M&amp;A in the oil and gas upstream industry, over $30bn of deals have been announced between July and August. While the most significant transactions occurred in the US, the flurry of activity has spread globally. Two high-impact acquisitions involved US shale assets with <a href="https://www.smartkarma.com/entities/10435" target="_blank" data-smartkarma-citation="entities:10435:1">Diamondback Energy (FANG US)</a> taking over Permian basin competitor <a href="https://www.smartkarma.com/entities/7697" target="_blank" data-smartkarma-citation="entities:7697:1">Energen Corp (EGN US)</a> for $9.2bn, and oil major <a href="https://www.smartkarma.com/entities/21847" target="_blank" data-smartkarma-citation="entities:21847:1">BP PLC (BP/ LN)</a> acquiring <a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1">Bhp Billiton (BHP AU)</a> ’s US shale assets for $10.5bn.</p>
<p>The sudden rise in deal activity coincided with a relative stabilisation in the oil price trend as the volatility dropped markedly (Exhibit 1) and the convergence of the oil price consensus forecasts to a new oil price floor of $70 per barrel (Exhibit 2). Notably, while the oil price increased by over 50% since July last year, the Independent E&amp;Ps Index is still close to the level when the oil price was trading around $50 per barrel. Disappointing second quarter results for the year reported by many E&amp;Ps have also contributed to the recent poor performance of the peer group.</p>
<p>As the new oil cycle finds its direction, the M&amp;A volume in the upstream oil and gas industry should continue to pick up in the second half of the year driven by the relative undervaluation of many E&amp;P companies. Converging oil price consensus expectations should also facilitate M&amp;A price negotiations. This insight will provide an overview of the industry themes emerging from the recent M&amp;A activity and assess which E&amp;P peer groups are the most undervalued in relation to the current oil price level.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/901/original/ex1.png?1535377939" class="editor-image img-responsive" data-smartkarma-image-id="61901"></figure>
<div class="content-caption">Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&amp;P companies with a market value greater than $300m as of 19 April 2018. Data as of 21 August 2018</div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/903/original/ex2.png?1535378033" class="editor-image img-responsive" data-smartkarma-image-id="61903"></figure>
<div class="content-caption"><em>Source: analysis based on Capital IQ data. Data as of 21 August 2018</em></div>

A wave of summer M&amp;A. After three months of subdued M&amp;A in the oil and gas upstream industry, over $30bn of deals have been announced between July and August. While the most significant transactions occurred in the US, the flurry of activity has spread globally. Two high-impact acquisitions involved US shale assets with Diamondback Energy (FANG US) taking over Permian basin competitor Energen Corp (EGN US) for $9.2bn, and oil major BP PLC (BP/ LN) acquiring Bhp Billiton (BHP AU) ’s US shale assets for $10.5bn.
The sudden rise in deal activity coincided with a relative stabilisation in the oil price trend as the volatility dropped markedly (Exhibit 1) and the convergence of the oil price consensus forecasts to a new oil price floor of $70 per barrel (Exhibit 2). Notably, while the oil price increased by over 50% since July last year, the Independent E&amp;Ps Index is still close to the level when the oil price was trading around $50 per barrel. Disappointing second quarter results for the year reported by many E&amp;Ps have also contributed to the recent poor performance of the peer group.
As the new oil cycle finds its direction, the M&amp;A volume in the upstream oil and gas industry should continue to pick up in the second half of the year driven by the relative undervaluation of many E&amp;P companies. Converging oil price consensus expectations should also facilitate M&amp;A price negotiations. This insight will provide an overview of the industry themes emerging from the recent M&amp;A activity and assess which E&amp;P peer groups are the most undervalued in relation to the current oil price level.

Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&amp;P companies with a market value greater than $300m as of 19 April 2018. Data as of 21 August 2018

Source: analysis based on Capital IQ data. Data as of 21 August 2018

Upstream Oil & Gas M&A Surges As Mixed 2Q18 Results Keep E&Ps Undervalued