Brodies – The Legal View – Oil price fall puts investors in prime position to seize M&A opportunities

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Welcome to Brodies – The Legal View, a regular column by Brodies LLP provided exclusively for Aberdeen Business News readers.

While the debate on when and how far the oil price will recover continues, the pressures and uncertainties in the market will act as a driver for M&A activity and present opportunities for those individuals and organisations that are positioned to take advantage.

The buoyant M&A market of recent times was driven in no small part by the availability of cash from the banking and private equity sectors to invest in the oil & gas market. As the fall in the oil price has brought costs into sharp relief, with the impact being felt all the way down the supply chain, the banks and private equity houses will inevitably be looking at their credit criteria whilst carefully monitoring their portfolio companies.

In spite of this, M&A activity will continue, driven in no small part by those same factors. The market is moving into a very different phase of the cycle, in which we would predict that the following trends are likely to be evident:

  • Proactive trade players will look to M&A activity as a strategic route to maintain their competitive edge.
  • Credit approval for bank funding may be more difficult, but funding will continue to be available for the right deals. Although the cost of new debt may increase, this cost could be offset by lower asset prices, meaning that the return on investment for borrowers remains attractive.
  • Trade players with strong balance sheets will be well placed to take advantage of the opportunities which arise from those companies with good businesses that are in the wrong stage of their funding cycle.
  • Private equity houses willing to take the long view may also seek to take advantage of the lower asset prices that are available.
  • The combination of reduced credit availability and the drive to reduce costs and retain competitive advantage could result in a larger number of smaller deals.
  • At the other end of the scale, the lower oil price could be a catalyst for a further wave of mega-mergers such as those that occurred in the late 1990s / early 2000s following BP’s merger with Amoco.
  • There could be an increase in paper transactions, as companies look to achieve synergies without having to invest significant amounts of their capital or increase their leverage.
  • Foreign money will play an increased role, in particular sovereign wealth funds and other investors that are able to take a longer term view on the oil price. The north east is home to market-leaders with world-class technology capable of exploitation globally, which will be attractive to foreign capital.

As for timing, we would predict that the market will remain relatively quiet in Q2, but that activity will pick up in Q3 and Q4. This is due, in part, to price alignment between buyers and sellers, which will inevitably take a bit of time to converge. Experience from the period following the credit crunch suggests that sellers who wait for asset prices to return to their peak can often be frustrated, so convergence should occur by Q3/Q4.

By that time, the market will know the fiscal measures that we expect to be introduced to assist the oil & gas industry in the forthcoming budget, and the impact that those measures will have.

As a result, the outlook for the Aberdeen M&A market looks more promising than might first appear.

Tom Boulton-Jones is an associate in the corporate team of Brodies LLP. For more information, contact Tom at tom.boulton-jones@brodies.com.

If there are any topics you would like us to cover in future columns, please email us at legalview@brodies.com.

The information in this article does not constitute any form of advice or recommendation by Brodies LLP and is not intended to be relied upon by you in making any specific decisions or taking (or refraining from taking) any action. If you wish us to give such advice, please contact the author.

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