Sinking oil prices may stifle deals, M&A expert says

HOUSTON – Uncertainty about where oil prices will land after their months-long slide will likely dampen the global market for oil and gas acquisitions over the next few months, says one of EY’s top deal advisers.

“It’s not so much the level of oil prices, it’s the volatility,” said Andy Brogan, global oil and gas transactions leader for EY, formerly known as Ernst & Young, in an interview with Fuelfix. “As long as buyer and seller agree what it’s going to be, then you can find a price. There’s a lot of uncertainty about where it will find its new level.”

Sellers typically expect to get a price for their assets based on the oil price at the time they decided to sell, while buyers look at forecasts for the first year they might develop the oil and gas acreage, he said.

“As they say, you don’t need to be an expert to get the oil price wrong, but it helps,” Brogan said.

Oil prices have fallen to their lowest point in several years, according to Bloomberg, with U.S. benchmark crude falling to $86.12 a barrel on Friday and international benchmark crude, Brent, at $90.26 a barrel. Prices have been falling for months because of sluggish economic growth and weak demand in Asia and Europe.

For the past three years, the fluctuations in oil prices have calmed dramatically, creating a solid starting point for oil and gas dealmakers. Brogan said he couldn’t remember a time when oil prices stayed at the same level for such a long period of time.

But that’s changing now. Over the past two years, the seller’s market has become a buyer’s market.

State-owned Chinese oil companies have filled up on crude reserves and can no longer be counted on as an aggressive bidder in major auctions. After a string of acquisitions over the past decade, Chinese firms are processing their purchases and developing their existing acreage. Likewise, U.S. oil firms are pulling back on international investments and pumping more cash into their U.S. operations.

“Two or three years ago, it was grow, grow, grow,” Brogan said. “Now it’s much more about optimizing the portfolio, managing the cost base and managing the risk profile.”

That means there’s more oil and gas assets on the market now than in many past years, but in the buyer’s market, deals are taking longer to close and the level of interest isn’t as robust, he said. As oil prices adjust to a slower global economy, deals will be harder to reach.

“We haven’t had a sustained drop in the price to the point it might waylay drilling in the United States, so no one really knows what that price point is,” he said. “We’re going to be into a new normal on supply-demand balance, but you don’t know at what price yet.”

That, largely, is up to the Organization of the Petroleum Exporting Countries, he said. OPEC controls the flow of vast amounts of oil production across the Middle East and in other areas of the world – one of the biggest factors behind the global oil price.

“You don’t know which way they’re going to jump,” Brogan said. “I suspect they don’t know either at this point.”