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Business & Finance Series: Research Spotlight

'There will be blood' - The price of oil and what it means for M&A

A new report from the M&A Research Centre (MARC) at Cass Business School provides insights into what falling oil prices might mean for mergers and acquisitions in the sector

by Kyla Njoku (Senior Communications Officer)

The study, part of a working papers series, takes a statistical approach to the question to discern what really drives M&A in the oil sector.

Researchers at Cass took data based on M&A activity over the last twelve years: examining all activity with no threshold on deal size, as well as looking at multiple factors simultaneously rather than employing a linear analysis using simple economic factors.

The model obtained has a very satisfactory predictive quality and was able to explain 58.4% of M&A activity in the sector.

“At this time of great turmoil in the oil sector, both in terms of corporate activity and uncertainty around the commodity’s value, it is interesting to find that there are some consistent drivers of activity in the sector.”

Dr Valeriya Vitkova, Cass Business School

To access the full research report please visit the MARC website.

Highlights of the Report show that:

It's never just about one simple factor and no model is perfect

The oil price has more than halved since 2013 and M&A activity has most definitely not. There have been an $84bn deal in the majors and the proposed merger of the #2 and #3 global Oil Services firms. The oil sector is unusual in that M&A activity does not show the correlation with economic activity that the broader market does. The best model researchers found uses the valuation of the sector and the US 5 year treasury yield as well as the oil price itself. Given the uncertainties around the oil price, researchers do not enumerate a point forecast for M&A but have three flex scenarios for different oil price, economic and market outcomes.

Some scenarios do imply more M&A than others

The scenario with the greatest number of deals, according to the reports model, would be a rapid recovery of the oil price to US$70-75/bbl. But the window would be short, with a pullback in activity soon after.

M&A is a necessity, unless you want to be running a much smaller business

Recoverable oil reserves are growing but in ever more inaccessible places, both geographically and politically. M&A is needed to simply maintain production levels or to bring down break even oil price levels through cost synergies. But for some stakeholders, notably your shareholders, is being a smaller business necessarily a bad thing? The market's reaction to recent acquisitions says it isn't.

Be prepared, but don't rush

The message that M&A isn't going to dry up given the oil price drop means that corporates always need to be prepared to deal with approaches by potential bidders. Perhaps more constructively the place to be is to have a strong balance sheet, and able to acquire either distressed assets (sector indebtedness has substantially increased in the last ten years) or those from forced sellers after their own mergers.

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