Sustained, low oil price regimes have in the past led to mergers and acquisitions in the oil and gas sector. During the 1990s for example, when oil prices fell to as low as US$10 per barrel, mergers and acquisitions such as Chevron and Texaco, BP and Amoco, Total and Elf, Exxon and Mobil, among others were realized.
Crude oil prices fell by an average of more than 50% between June and December of 2014. Although they have since recovered, they are still more than 40% lower than last year’s highs. The impact of that price slump on the oil and gas industry has however been quite severe: among others, more than 120,000 jobs have been lost and spending cuts have been in excess of US$114 billion.
With substantial financial and other resources, the major Integrated Oil Companies, IOCs, have outperformed other groups in the current oil price regime. For example, their downstream (Refining and Marketing, R&M) performances have countervailed upstream (Exploration and Production, E&P) losses.
Among the tight oil (and mostly E&P) operators, the impact of the oil price slump has been more severe. In this group are the shale and oil sands producers in the United States and Canada respectively. In addition to the higher production breakeven prices, many in the group are saddled with high degrees of financial exposure. They had borrowed heavily against their assets to finance operations; but with the oil price slump, the values of those assets as well as production revenues have tumbled.
If low oil prices endure, some of these companies may invoke second-tier adjustments; this could enable companies with great financial muscle and complex, higher-cost operations to acquire quality assets at low prices. Viewed in the light of current market fundamentals, global oil price rebound would most probably be slow and protracted. Continue reading