Aftershocks of the bitter Saudi Arabia-Russia oil–price dispute and subsequent negotiated production cuts to stabilize plummeting oil prices into July, fueled by a massive plunge in demand due to the COVID-19 pandemic, have created an unparalleled environment for M&A in the Oil and Gas industry.
Our recent virtual roundtable discussion, co-moderated by Molly Smith, sales manager at SS&C Intralinks and myself, featured Oil and Gas M&A industry experts Manny Grillo, bankruptcy and restructuring partner at Baker Botts; Ian Graham, senior finance director – corporate development, tax & treasury at Calgary-based Trican Well Service; and Jamie Garrett, principal at JoyCap Advisory LLC (formerly VP M&A, Direct Energy).
Together, they shared their perspectives and provided historical context for this combustible combination of current market pressures and events.
“While there will be some short-term pain, systemic and long-term change is needed in order to overcome where we are today,” said panelist Elizabeth Lim, senior market intelligence analyst at SS&C Intralinks, who kicked off our roundtable discussion highlighting the often-tumultuous Oil and Gas landscape in recent history.
“In the short-term, we have seen and will continue to see a significant amount of distress and existential crisis for upstream, but we’ll also see opportunities in midstream and other areas,” said Lim. “Larger firms that survive could see a bonanza in asset acquisitions on the horizon.”
Lim added that, in the long-term, “it’s very clear that the industry has a need for changing and adapting in order to survive. If COVID-19 didn’t happen, another crisis would have.”
“We’ve already seen that things like climate change and the rise of renewables are here to stay. This is really starting to affect not only corporate policy strategic initiatives around the globe but also governments in those affected regions.”
The current COVID-19 pandemic and new M&A activity in oil and gas
As targets try and value themselves with pre-COVID-19 metrics, acquirers are trying to use post-COVID-19 metrics. Ultimately this could result in a very large gap in numbers.
“How many companies are actually able to be acquirers? This is going to have very toxic impacts on various balance sheets throughout the industry, never mind the turmoil we’ve been through the last three to five years,” said Ian Graham. “There are very few companies in oil field services that can actually be active acquirers, and are they prepared to risk their balance sheets to do so?”
Jamie Garrett said that the industry has seen a lot of resilience on the downstream side. She observed that the integrated model of utilities delivering power generation to end-users has been quite stable and successful during this time of upheaval.
“You are going to see continuing aggregation plays and consolidation in the market, but I think we are also going to see scope extension,” said Garrett. “When we talk about traditional oil players, somebody like a Shell comes to mind. They’ve been very, very active entering the retail markets and entering new technologies where they have the net-zero targets and their ESG target, so I think you’re going to start seeing more activity there, and it’s probably going to be on a much, much smaller scale.”
Garrett added that companies will be “diving into the lower end of the mid-cap size transactions, but there are going to be opportunities for those companies who still have cash on their balance sheets to make moves during and post this crisis.”
Valuations in the current market
Manny Grillo gave his insights as to how companies can conduct a successful transaction under today’s special circumstances.
“Do we restructure the debt first, or do we try and do a deal at the same time?” said Grillo. “I think with the debt-load these companies have, and the need to reserve cash for the business, I think we’ll have to see the restructurings first and then, once the companies have gone through [it], you’ll see on the backside perhaps more consolidation.”
“Truthfully, too, people are going to wait for the market to normalize a little bit more and see what this post-pandemic market is going to look like,” he added.
Continuing throughout the roundtable discussion, I asked panelists how companies can get creative with valuing assets, what kinds of metrics oil and gas companies should focus on and the role banks and lenders will play moving forward.
These topics — including a final consensus on whether we should be pessimistic or optimistic in our return to “normal” — and much more are discussed in-depth by our panelists. I invite you to watch the engaging and informative conversation in its entirety here.
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