Over the past quarter, oil and gas M&A activity generally maintained the momentum it had gained in the second quarter. The value of activity in the second quarter was the highest in three years, totaling $115 billion, driven largely by a single $70 billion deal between Royal Dutch Shell and BG. The Marathon acquisition of MarkWest Energy Partners for $15.8 billion and Schlumberger’s plan to acquire Cameron International for $14.8 billion were among the large deals announced in the third quarter that pushed the total worth of deals announced in oil and gas sectors above $320 billion.
Lower interest rates and the overall positive economic outlook for the U.S. have boosted M&A activity across most of the sectors. In addition to these encouraging cross-industry factors, the extreme financial difficulties faced by many smaller and mid-sized upstream players caused by low energy prices have made them good acquisition targets, further encouraging M&A activity in the oil and gas sector.
The situation is not as favorable on the deal financing front. The downturn in the energy market and concerns around oil and gas companies’ liquidity and cash flows have already set off a trend of credit downgrades across the oil and gas sector. Chesapeake Energy, Denbury Resources and Whiting Petroleum were amongst the several U.S. oil and gas companies that had their ratings downgraded by S&P in late October. Other companies such as Exxon and Chevron were also given negative outlooks, which essentially indicate the possibility of a downgrade in the near future. As a result, oil and gas companies are now focusing more on cost cutting plans to support their M&A activities. For instance, in early November, Royal Dutch Shell announced plans for further benefits and cost cuts to support its acquisition of BG, which is scheduled for completion by early 2016.