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Energy M&A rides atop the rising oil wave

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operating computer The oil industry is enjoying a resurgence after the several-year downturn. Optimism is prompting a comeback for M&A, with alliances and purchases now centered on thriving rather than surviving. Three factors behind the M&A surge are financial conditions, exports and technology.

Uptick in financial conditions Positivity is mainly due to a sunnier financial picture. Oil prices are trending upward — based in part on improved well performance, which in turn is helping to increase property values. Price stability, not to mention growth, is making it possible to realistically value property and make valuation predictions.

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Production is improving, thanks to a step-up in well performance. Pouring technology and other innovation into the business is paying off in quality, quantity, investment and value.

Results are also returning from leaner and more efficient financial practices and operations. Many exploration and production (E&P) companies emerged from the downturn having learned lessons about capital and cash flow, and the importance of keeping sound balance sheets. They became adept at renegotiating debt and extending terms. For some, the lessons were still being learned in 2014. In the midst of that year’s boom, production was expanded, at a significant cost. But those that had hedged were able to get costs in line. And if companies could avoid capex or operating expense by squeezing out oilfield services, that’s what they did. As a whole, companies have reoriented financial policies, aiming for stability, cost containment and investment appeal. Much of the industry is on more solid financial ground, well-prepared for M&A.

Energy sector M and A Some companies are being offered a different kind of private equity financing. Dry powder on reserve during the most recent industry lull is selectively backing operating arrangements or particular projects, rather than the entire company.
The upstream segment has been active in M&A, with a great deal of acreage changing hands. Given the responses of Grant Thornton’s Energy Trends in 2018 webcast audience, M&A activity will continue.

Outpouring in exports Attractiveness for M&A is benefiting from the 2016 lifting of restrictions on oil exports from the United States. By the end of October 2017, producers were sending a weekly average of about 2,000 barrels out of the country. “That makes us a legitimate oil exporter country,” said Grant Thornton Transaction Services Partner Kyle Reid. “Along with other refined products, we’re now exporting crude oil — something we weren’t allowed to do a short time ago.” It’s a game changer, Reid said, that positions the nation as a leading provider of oil and gas services around the world.
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Exports have risen quickly since the ban was lifted in 2016.

Vitality in technology Access to the advantages of technology is shaping the business of E&P. A large part of the credit goes to new-generation leadership moving into places vacated in downturn labor cuts and early retirements. The workforce changeover is bringing a focus on technology — data collection and analytics, robotics, efficiencies in operations and technical drilling. In the business itself, technology is strengthening strategizing, planning and monitoring.

What is ahead for oil M&A? The M&A outlook is favorable for the entire industry and each market segment. Upstream is already experiencing a rebound in property values. Midstream will continue to gain master limited partnerships because of increases in export. This change — getting more crude out to the global markets — makes the segment a much safer investment for private equity and infrastructure funds. Downstream’s pickup in retail activity is becoming obvious, with deals in gas station and c-store rising.

There are good reasons to be very optimistic about M&A, said Reid. “There’s price stability, which helps people understand the kind of capital returns to expect. We are leaner and more efficient. We’re getting better every day. There’s a lot of dry powder out there. It’s still in some ways a seller’s market.”

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Contacts
Kevin Schroeder
National Managing Partner, Energy Industry
T +1 405 415 3550

Kyle Reid
Partner, Transaction Services
T +1 832 384 7050

Mel Schwarz
Legislative Director, Washington National Tax Office
T +1 202 521 1564