Mergers in a Low Oil-Price Environment: Proceed With Caution

Topics: Asset/portfolio management
Historically, oil-price down cycles have led to an increase in M&A activity.

Unlike what happened during previous oil-price collapses, merger and acquisition (M&A) activity has been limited since prices started to fall in 2014. But the signs are that M&A activity may be building, and oil company management teams should think about which deal strategies they should pursue. The oil-price trend has historically been one of the most important determinants of how value is created in the oil and gas industry, and some M&A strategies that worked in the rising-price environment over the past 15 years may not work in today’s market. This article examines the industry’s M&A performance across cycles back to 1986 and identifies strategies that could help companies create value through the price trough, measured by total returns to shareholders.

Most commodities industries are prone to consolidation during the downside of the cycle, when supply surpluses accumulate, prices fall, and competition heats up. The oil and gas industry is no exception. In the 1998 to 2000 price trough, more than 25 deals greater than USD 1 billion in value were executed in North America alone, including the BP-Amoco, Exxon-Mobil, and Chevron-Texaco megamergers. In total, this wave of deal making amounted to more than USD 350 billion in just over 2 years. It took another decade to match the same amount of deal volume in North American exploration and production (E&P).

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Mergers in a Low Oil-Price Environment: Proceed With Caution

Bob Evans, Scott Nyquist, and Kassia Yanosek, McKinsey & Co.

01 August 2016

Volume: 68 | Issue: 8