gE Blog Series: Global Energy Part 2 - Low Oil Prices and Potential Mergers

The extremely low oil prices that have characterized the energy industry for the past few months are making waves all around the world. In some countries, low prices have been seen as a benefit; in others, not so much. A major consequence has arisen that will affect all nations regardless of economic status: oil corporation mergers and takeovers. Historically, it has generally been the case that when there are low prices in the energy industry, mergers and acquisitions occur between bigger and smaller firms. Several plants and companies that originally profited immensely off of high oil prices, will now either have to severely change business strategies or be forced to relinquish control to more powerful firms in the industry.

Smaller oil companies, many of which are in debt, are being severely affected by the drop in oil prices. Because of this, many of them are preparing to take action. Some of their options for now are to unload their property to raise more money, share oil rigs with other companies, or end up selling themselves. Inevitably, it seems like the third option will be the most common case. Already in France, the firm Technip is buying out the smaller firm CGG. However, big oil companies and corporations in the struggling industry are also being hit hard by the price drop. Halliburton, the second biggest oil-field service company in the world, just bought out Baker Hughes Inc, which comes in at number three on the same list. BP and Royal Dutch Shell are in merger talks, a discussion that occurs almost every time oil prices drop. Costs will have to be cut back if prices continue to fall, which will put new projects on hold. BP is also planning a major restructuring in the coming year, which is estimated to cost about $1 billion. This restructuring may include cutting hundreds of office jobs in its divisions in the United States and the United Kingdom.

One of the problems here lies in the difficulty of predicting the trends in the price of oil. Although investment bankers and economists have given various predictions, it is still unclear as of now as to which direction oil prices are going to go. Some claim that this low period is just temporary and will not last long, whereas others predict consistently low prices for the rest of 2015. However, the length of oil's low price period thus far, at least six months, makes it seem unlikely that it is going to end anytime soon. If this is the case, the energy industry has much to worry about in this coming year. The trend of mergers and takeovers between companies is sure to continue throughout the course of this year, as long as oil prices continue to stay low.

If you missed it, here is the link to part 1 of our Global Energy series!