As always the culprit is the oil price, which has halved since the closing days of 2015 and is now hanging around the $US50 per barrel mark, largely due to oversupply from Saudi Arabia and the US.
With nations such as Brazil, Russia and Nigeria pumping at record levels, OPEC not planning on cutting production, and Iran potentially re-joining the international community, there is little chance of a return to the good old days of $US80/bbl oil which makes it a buyer’s market for assets, but few are willing to open their wallets.
Many commentators say prices will eventually recover to more normal levels as cuts in exploration and development drilling lead to falling production but that could take years and, in the meantime, sellers are wary about getting ripped off.
“For any well-capitalised company, this quarter could have been seen as a rare opportunity to acquire oil assets at a steep discount to historical levels,” Evaluate’s Eoin Coyne said.
“However, with sellers seemingly of an opinion that the oil price is lower than fair value, an impasse has been reached, resulting in the lowest value quarter for oil and gas deals in the seven years that Evaluate Energy has been tracking all global oil and gas transactions.”
The analyst said private firms, free from the burden of satisfying a large group of shareholders, were making up an increasing percentage of buyers in the current market.
While traditionally private firms have represented 10% of publicly disclosed asset sales, the number spiked in the first quarter to 58% of the total global deal value at $4.1 billion in corporate and asset acquisitions.
Further, non-traditional deals have been explored, such as Quantum Energy Partners’ initial $1 billion strategic acquisition alliance with successful developer Linn Energy, allowing Linn to maintain its momentum in a cost cutting environment.
Not surprisingly, the shale business has been put through the shakers.
Shale resources have carried a lot of the blame for the oil glut, but many of the oldest wells have comparatively short life cycles, at least in terms of strong initial production rates, and the costs needed to drill new wells mean many are no longer economic at $50/bbl.
Shale plays are extremely sensitive to downward price changes, which explains why the US rig count has halved in the past year and now sits below 1000.
The effect of the price downturn on M&A in the shale industry resulted in the first quarter deal turnover reaching its lowest level since 2009 – just $400,000 compared to an average of $8.9 million over the past five years.
“Even though the oil price is resting at attractive levels right now for buyers, it's clear that this quarter has come too early for many to make opportunistic acquisitions,” Coyne said.
He said the second and third quarters would see the squeeze start to be applied to many companies, leaving debt-laden ones – especially in the shale space – forced into fire sales.
That will be the real buyer’s market.
