Oil and Gas M&A Seen Accelerating as Fear of Bad Deals Fade

Energy acquisitions are poised to pick up as oil and gas prices stabilize and fears of bad deals wane, according to Ernst & Young LLP.

Acquisitions will accelerate in the fourth quarter with most of the announced deals coming through next year, Andy Brogan, global oil and gas transaction leader at the consultancy said. There are about 2,000 energy assets available globally and buyers and sellers are gaining confidence as industry price expectations “coalesce,” he said.

Oil has traded in a range between about $42 and $52 a barrel since early June after almost doubling from a 12-year low in February amid speculation a global glut is easing. Oil and gas deals in North America alone so far this year have outpaced mergers and acquisitions in the same period in 2015, according to data compiled by Bloomberg. Last year as a whole marked the lowest level since 2004.

“Everybody has now sort of reset to a new forward curve,” Brogan said by phone from London on Friday. “The way the market was moving destroyed peoples’ confidence that they understood how the market works. People can now have a conversation about what an asset is worth with both sides being comfortable that they’re not going to be made fools of by doing the deal.”

Marginal Costs

About 80 percent of the assets announced for sale are upstream projects, according to Brogan. Price expectations for as long as a 15-year period may help buyers assess the value of an asset that has a 20- to 30-year life span, he said.

Global oil prices are now set by the cost of marginal U.S. shale production, Brogan said. Insufficient investment in future output because of lower prices means that in two to three years the market may move back to where the Organization of the Petroleum Exporting Countries produces the marginal barrel, according to Brogan.

“At that point in time, you have OPEC back in a position where if they act coherently they could reintroduce price discipline,” Brogan said.

Exxon Mobil Corp. last week agreed to acquire natural gas explorer InterOil Corp. to add discoveries in Papua New Guinea to its portfolio. With the range of potential payouts valuing the agreement at as much $3.6 billion, it may represent Exxon’s biggest acquisition since the $35 billion purchase of U.S. shale explorer XTO Energy in 2010.

“We have seen a number of processes initiated in the last month or so that indicates that firstly, there is renewed confidence among sellers, they can actually start a process and actually get to a conclusion,” said Brogan. “Secondly, we are also seeing a renewed interest on the buyers front.”