Oil majors have a mixed record of timing the bottom in oil prices. That’s the message from the last 35 years of oil price and merger and acquisition (M&A) activity in the sector. While much of the attention in recent days has focused on acquisitions by BP, Exxon, Total and Repsol in the late 1990’s (as Brent crude prices bottomed out close to $10 per barrel), there was also a flurry of M&A activity in the mid-1980’s, just before oil prices slumped by almost 70%.
M&A activity doesn’t just happen because of the pressure of low commodity prices. Many take place because of strategic factors, like gaining a stronger position in another energy type, region or to acquire other assets (i.e. horizontal or vertical integration). And after spending enormous sums on expensive production many oil majors are ill-equipped to deal with low oil prices and need to improve the quality of their portfolios.
Shell’s bid for BG Group allows it to expand into the rapidly expanding gas markets, but it is still very much predicated on the basis of higher oil prices. In line with industry consensus the oil major assumes Brent at $67 per barrel in 2016, rising to $75 per barrel in 2017 and then $90 per barrel through to 2020.
Shell and other oil majors might well think that now is a good time to snap up assets in the belief that in a few years time it will look like a smart move. So does Shell’s bid represent the deals of the 90’s or the 80’s? While oil may look cheap compared with where it has been over the past four years oil bear markets tend to be protracted, lasting between 11 and 28 years. In comparison the current bear market is less than 3 years old (based on Brent peaking around $127 per barrel in early 2012).
In one sense Shell’s bid, if it kick starts more M&A activity could be seen as a sign of capitulation in the face of the shale revolution and low oil prices. In the words of The Economist magazine;
Contrary to some expectations, the oil-price fall has not derailed the American shale boom. The small, flexible and innovative companies which specialise in horizontal drilling and hydraulic fracturing are proving better at cutting costs, raising productivity and adapting to market fluctuations than the lumbering giants who have long dominated the industry. Dinosaurs may mate, to ensure the survival of their species, but this is an age of mammals.
Related article: Q&A: What does Iran framework agreement mean for oil markets?
Related article: Oil prices: History does not repeat itself, but it often rhymes