Consolidation of the Energy Sector

In the wake of the drastic decline in oil prices since last July, and with the current crude oil prices about half of the 2014 peak, Royal Dutch Shell PLC announced Wednesday that it would buy fellow Oil and Gas Company, BG Group, in a deal amounting to approximately $70 billion. Assuming the deal is completed, this would be the largest energy merger since Exxon and Mobil in 1998, and would create the world’s largest independent producer of liquefied natural gas. The merger comes as an effort to create cost synergies, or eliminate overlapping costs, in order to offset the effect of low oil prices.

Because many other companies in the energy sector are in a similar financial position to both BG Group and Shell, this deal might only be the beginning of a wave of mergers and acquisitions in the energy sector, as the sector consolidates in an effort to compensate for the difficult financial conditions. Research analysts at Accendo Markets stated that, “the decline in oil price over the past year has battered some stocks which are clearly now looking attractive” and continued on to predict that “this could mark the beginning of a M&A rave, much like the one we saw in the late 1990’s.”

While it is unlikely that there will be a larger deal than this Shell/BG merger in the near future, there are still several small to medium size oil and gas companies that are being viewed as possible targets for the larger corporations. According to Morgan Stanley, all of the major oil companies, such as Shell, Exxon Mobil, Total SA, Chevron, and BP, have accumulated a record amount of debt this year with an eye on potential acquisitions.

While many analysts are predicting this surge in mergers and acquisitions, some believe the wave will be much smaller than predicted. These analysts cite the fact that the current volatility of oil prices will make it difficult for buyers and sellers to agree to terms. Other major roadblocks to potential mergers, according to Jefferies Group, are “major negative tax consequences and…limited cost-cutting/synergies”. In the end only time will tell whether the other major oil companies will follow Shell’s lead, or if they will simply avoid the risk associated with mergers altogether.