Lower energy prices continue to drive oil services consolidation
In December 2014, The Wall Street Journal wrote an article that asked the question, "Will cheap oil lead to big mergers?" At the time, oil prices had been down since June and industry analysts were expecting major merger and acquisitions to occur as a result. The writers cited significant oil crashes in the 1980s and 1990s, along with the slight decline in the mid-2000s, which caused leading enterprises to buy up smaller businesses.
Why does low oil prices equate to more consolidations?
Petrie Partners, a investment banking firm for the oil and gas industry, published an informative report that was shared on the Independent Petroleum Association of America's website, outlining the three unique waves of M&A activity in the oil services industry from 1980 to 2014.
These waves correlated to low oil prices, Petrie researchers explain, because there are more opportunities for larger companies to absorb smaller ones. Enterprises can cut costs and benefit from economies of scale, while participating businesses can visualize the trade due to good relative value as opposed to lower absolute value. Essentially, lower energy prices, means it is easier for the industry to consolidate and continue to profit.
While every environment and company is unique, Petrie explained that the similarities in recent years to past events in history are too similar to ignore. The only predictions that could impede this M&A progress, the researchers say, would be further market volatility or rapid increases in prices.
What about today?
On May 19, industry oil prices fell yet again, as federal rate hikes lifted the value of the dollar, while crude faced losses due to supply outages from Nigeria's main oil terminals, according to Reuters. Furthermore, Technip, a French project management, engineering and construction company for the energy industry, and FMC Technologies, its U.S. rival, announced they would be merging.
The companies announced that the newly combined company will be called TechnipFMC and will seek to revolutionize the production and transformation of oil and gas. Doug Pferdehirt is the current president and COO of FMC Technologies. Following the merger, he will assume the role as the CEO of TechnipFMC.
"This transaction will allow us to deliver even greater benefits to our customers through a broadened portfolio that provides a unique set of integrated technologies and competencies that are underpinned by a history of developing rich partnerships and creating customer success," Pferdehirt said. "We look forward to rapidly bringing together the outstanding employees and cultures of both companies, as well as the complementary capabilities of our organizations, to position the combined company at the forefront of a new generation of solutions for the oil and gas industry."
This merger will allow the companies to diversify their revenue mix and drives cash flows, along with accelerate growth and industrywide innovation while oil prices continue to decrease.