Breakout Together – Consolidating in a Time of a Shakeup

In the past year, leading oil and gas companies across the supply chain have announced plans to significantly reorganize, signaling a broader industry trend of consolidation. For instance, Hercules Offshore, a major drilling services provider that once had a market capitalization of over a billion dollars, recently filed for Chapter 11 bankruptcy. In April 2015, Shell announced its plan to acquire BG Group for $70 billion. To better understand the impact of lower commodity prices and implications to distressed players it is important to analyze trends in two common exit strategies: bankruptcy and M&A.

Current State of the Market

Generally, a company may choose to file for bankruptcy protection if its investors believe the company can emerge from the protection period as a profitable company. For instance, EPL Oil & Gas filed for Chapter 11 bankruptcy in 2009 when oil prices crashed from over $140 per barrel to about $30 per barrel. EPL emerged from the bankruptcy stronger than ever and was eventually acquired by Energy XXI for $2 billion in 2014. Lux tracked 112 bankruptcies totaling $29 billion in liabilities (at initial filing) from 2010 through Q4 2015 (see Figure 1). The oil and gas industry averaged 3.3 bankruptcies per quarter from 2010 through Q2 2014 (right before prices fell). Since then, the average number of bankruptcies per quarter more than doubled to 7.6. The average total liability per company increased four-fold from $600 million per company pre-Q3 2014 to $2.5 billion afterwards, suggesting that larger, more established companies have been filing for bankruptcy. Major bankruptcies in Q3 2015 include Sabine Oil and Gas, Hovensa (joint venture of Hess and PDVSA), Hercules Offshore, and Samson Energy, each which has at least a billion dollars in liabilities.


Lux also tracked 9,687 M&A deals with a total transaction value of $2.35 trillion (see Figure 2). While the number of bankruptcies has increased dramatically, the number of M&A deals has actually trended downward. Since Q3 2014, there was an average of 360 M&A deals per quarter, down from the average of 418 deals per quarter between Q1 2010 and Q2 2014. However, between the two time periods, the average size of each M&A deal has increased from $163 million to $291 million, again suggesting large players have been prime M&A targets. Major recently announced M&A deals include Repsol/Talisman, Halliburton/Baker Hughes, Schlumberger/Cameron International, Noble/Rosetta, and Shell/BG.


Preparing for the Future

Goldman Sachs’ most recent forecast predicts oil prices may remain at $50 per barrel through 2020. For companies seeking bankruptcy protection today, a prolonged recovery means most will not emerge profitably like EPL did when the down cycle lasted just a year. For well-capitalized players, an industry-wide fire sale could strengthen their long-term competitive positions. During this period of consolidation, suppliers should consider repositioning their product portfolio away from the needs of oil and gas producers with assets in regions that have high lifting costs like the Alberta oil sands and Venezuela’s Orinoco Belt. While there are technologies from companies like Independent Energy Partners and ETX Systems that promise to lower overall production, transportation, and processing costs, many of these are capital intensive – a barrier that may be insurmountable during a time when buyers (oil and gas companies) are shedding costs across their organization.

That said, there is still opportunity for new technologies in high potential, relatively underdeveloped plays. Tight oil and shale gas will continue to be an attractive market in North America because many major independent operators have found innovative ways of cutting costs already, from reducing nonproductive time to data-driven use cases of predicting equipment failure. Internationally, China and the Middle East continue to remain open to emerging technologies. TouGas and ChemEOR, both initially focused on the frac fluid market, have plans to expand into the enhanced oil recovery market in China. NEOS Geo, a geophysical services provider, said it has seen significant interest from Middle Eastern NOCs to find and develop gas.