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Mergers & Acquisition Activity Driven by Efficiency

Tubular Bells Production 2014

When Kosmos Energy acquired Hess Corporation’s assets offshore Equatorial Guinea last year, the deal pointed to a trend for 2017’s mergers and acquisitions: an effort to focus regionally and reap as much value and efficiency as possible from assets, according to Deloitte’s Oil & Gas Mergers and Acquisitions Report for 2017.

“Oil and gas companies seem poised to benefit from the potential nascent recovery after having spent three years or more adapting to the ‘lower-for-longer’ business environment. Global and US rig counts remain stable, and the oil market is closer to balance as lower Organization of the Petroleum Exporting Countries (OPEC) production quotas and increased demand have reduced oversupply. However, overall merger and acquisition (M&A) deal value and count remained below 2016 levels in 2017, which seems to reflect a higher level of caution,” stated the report.

Despite more stability in 2017 and heading into 2018, the sector still faces challenges and industry players are cautious, leading to a decline in deal count compared to 2016. The major deals that did take place, like the Hess acquisitions in Equatorial Guinea, were driven by a need for portfolio optimization.

Hess began producing at Equatorial Guinea’s Ceiba field in 2000 and in the country’s Okume complex in 2006, holding an 85 percent stake in the two producing areas. However, most of the US-based company’s operations are located in the Americas. In contrast, almost the entirety of Kosmos Energy’s assets are already located in West Africa. The deal also led to Hess reaching a tax settlement with the Government of Equatorial Guinea.

“Portfolio optimization has mostly stemmed from the need for large companies to reduce debt levels and/or focus on a handful of core areas. Hess’s divestments in the North Sea and West Africa were certainly notable, as was Shell’s sale of its Canadian oil sands assets to Canadian Natural Resources. With flat oil and gas price expectations, recent upward moves notwithstanding, many companies are choosing to focus more on fewer key regions or plays. There could be opportunities to achieve economies of scale (rather than scope), plus smaller buyers with deep regional focus are likely to be better positioned to create value in more mature assets,” the report states.

In addition to portfolio optimization, the report also credits consolidation as a driver of 2017’s limited M&A activity, allowing primarily large companies to take advantage of economies of scope and scale.

Overall, the report expects industry investment will raise and an increased confidence in the sector could result in more deals in 2018.

“Upstream continues to lead, but as production continues to grow, that could unlock interest in oilfield services (OFS), midstream, and downstream,” according to the report.

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