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M&A bargain hunters explore options

Depressed prices and the availability of previously out-of-reach assets may encourage the largest firms to relax their cautious approach, say PE Live panellists.

The majors’ recent playbook of a laser focus on capital discipline and eschewing large-scale M&A may be at least temporarily suspended to take advantage of buying opportunities in a market upended by Covid-19, panellists on the second PE Live webcast suggested this week.

“In [previous price] crises, it has been the case that the big players have looked at strategic deals,” says Anthony Patten, head of oil and gas at law firm Shearman & Sterling. Patten can point to his own past experience working in-house in the 2000s for Shell, which looked “for a very long time” at a move on UK-headquartered BG Group but took until after the 2014 price slump to execute on that strategy.

“So, there may be some targets that have been looked at by the majors for some time, and now presents an opportunity to act,” says Patten. The US majors “may be in a good position to snap up some cheaper opportunities”, he suggests.

Any company, whether a major, other large IOC or even a NOC “will always have a perspective on possible gaps in their global portfolio, and on top quartile assets and positions around the world,” agrees Greg Zdun, head of oil & gas, power and utilities, Asia-Pacific at bank JP Morgan. 

Hurdles remain

Given the current fall in both commodity and equity prices, such prized assets “may begin to look attractive”, says Zdun. But he adds a note of caution that, as well as simply looking good economically, deals must also be “actionable and, with that, other cultural considerations need to be factored in”.

Zdun does not expect majors to give up their previous capital discipline easily when assessing potential opportunities, and that brings another potential hurdle. “In any company, there is always going to be a portfolio, which include both the crown jewels and other assets that are perhaps non-core,” he says. “As you assess whether or not a corporate-level acquisition could be attractive, you have to take a holistic approach—can you justify integrating the organisation with both its high quality and non-core assets, and, if not, what are the alternatives such as future asset dispositions?”

Any company, “will always have a perspective on possible gaps in their global portfolio” Greg Zdun, JP Morgan

The appetite of sellers may be helpful in reducing some of the obstacles to dealing, according to Chris Rachwal, head of M&A at consultancy GaffneyCline. “We have seen that, in good times, holders of high-quality assets want to hang onto them and take a lot of cash flow from them. But, in tougher times, there is greater recognition that these assets are not just a licence to print money, but that they do require investment,” he says.

As such, it may be that acquisitions are driven less by bargain hunting in a depressed price environment, and more by greater opportunity to buy. “Those who may be potentially short of growth in their portfolio or looking for stable, long-term oil, gas or LNG supply may take the opportunity to ask the question, ‘What could I do now that I could not do last year or the year before?’” predicts Rachwal.

The second PE Live webcast, “M&A: Price volatility, logistical challenges…and bargain hunting”, in association with Shearman & Sterling, is available on demand here.

You can also catch up on the first PE Live webcast, “Crisis in oil demand: The longer-term market implications”, in association with professional services firm EY, here.

The third PE Live webcast, “Oil and gas contracts during and post Covid-19”, in association with law firm King & Spalding, will take place on Thursday 23 April. Please register to attend here.

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