The oil and gas industry has recently witnessed a surge in prevalence of mergers and acquisitions, according to an October 2015 article published by CNBC. Specifically, deals between various oil and gas companies that “process, store, and transport oil and gas reached $63.5 billion in the third quarter,” an amount that accounts for more than two-thirds of all merger and acquisition activity in the energy industry in the United States. Companies aren’t always offering cash, though; in fact, according to the report, a source from PricewaterhouseCoopers declared that many of the transactions were “equity for equity,” or those that involve stocks.
Of course, it is not rare for larger oil and gas companies to acquire other, smaller ventures on a regular basis. But the recent increase in mergers and acquisitions amid an industry faced with falling prices coupled with soaring supply has many people asking the same question: why now, especially given the recent capital contraction felt across the industry?
Capital Contraction: No More Time to Wait
Very often, mergers and acquisitions occur because the smaller venture is no longer able to pay off its debts or support its organization, and instead is taken over by an acquiring business interested in increasing its presence in the industry. To be sure, the acquired company is not required to accept the potential purchase; in fact, many such ventures with heavy debt may choose to use current reservoirs of capital to fund business activity now, with the aim of higher profits in the future. This allows the smaller organization to continue business without being acquired.
In times of capital contraction, however, this strategy is not as feasible for many; a host of smaller midstream oil and gas companies may have exhausted their stores of capital during the price downturn, and are now no longer able to service any debt they accrued during the course of business. As such, they face a short list of options, two of which may include declare bankruptcy and cease operations, or accept an acquisition.
Will Acquisitions Continue Into the Future?
As long as the price of oil remains low, and as long as operations continue steadily nationwide, smaller midstream oil and gas companies may further struggle to keep pace with the lagging demand. And, as a result, these businesses may be forced to consider the possibility of a merger.
But will merger and acquisition activity continue well into the future, even if prices rise? While smaller companies may need some time to build up adequate stores of capital, rising prices of oil and gas may, in turn, signify a future decrease in mergers.
The outlined processes are necessitated by the current market, but the flexibility of options in these mergers and acquisitions shines a positive light on the resilient nature of the oil and gas industry.