Global Market Update: Oil & Gas – July 2015
“Fundamentally, there’s little to suggest the market is due for an upside correction anytime soon. Oil supply remains plentiful and the constant threat of more barrels entering the market (from Iran) is placing a virtual cap on prices. Adding to this bearish sentiment is the emerging technical downtrend which could engender further selling pressures – as speculative players may seek to capitalize through short position taking. Further price decay could see some of the more vulnerable upstream players in the industry reaching for the taps.”
Oil price benchmarks traded lower in June and early July as both fundamental and technical indicators combined to paint a bleak picture for global oil prices. On the fundamental side, over-production by OPEC, an increase in US oil stocks and a rise in US rig counts supported the notion of an over-supplied market. Chinese demand meanwhile was also seen to be slowing as crude oil imports reduced to US$55.73 billion during the Jan-May period, almost 50 percent lower than the same period last year.1 The technical picture also provided little comfort as an emerging medium-term downtrend became more entrenched – and a 20 percent fall since May has seen a return to a bear market. On July 6th, oil prices sunk to a near 3-month low. The ICE Brent futures contract sunk to intraday low of US$55.1/bbl, while the US NYMEX WTI benchmark fell to US$50.58/bbl.
The global M&A market in the oil and gas sector appears to be slowly recovering from the sluggish start seen in Q1 2015, according to data published by IHS. Global deal value in Q2 2015 was estimated at approximately US$190 billion, a 34 percent y-o-y rise. However, the number of deals reported was significantly below 2014 levels, down 41 percent compared with same quarter last year. The disparity in deal value and deal count was attributable to the Shell-BG merger which accounted for around 70 percent of the total deal value for the upstream sector. Upstream M&A activity was estimated at US$120 billion for Q2 2015. Mid-steam M&A activity was also a significant contributor to deal value in Q2 2015, accounting for almost one-third of the total at around US$60 billion.
The low volume M&A activity of 2015 is a far cry from the high-value, highvolume activity seen in 2014 – where the oil and gas sector recorded its highest ever annual deal value of US$523 billion, more than double 2013 levels. During this period unconventional reserves and resources enjoyed an 80 percent rise in acquisition spending. However, plunging oil prices since November 2014 has disturbed momentum in the M&A market and made potential buyers and sellers more selective with their M&A activities. Despite the uncertainty around oil price, cash-rich companies with strong balance sheets and opportunistic parties will continue to closely monitor acquisition opportunities within this sector – as many upstream players remain vulnerable with oil trading below US$70/bbl.
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