Collapsing oil prices are beginning to throttle the M&A market. Deals already underway are being shelved, would-be buyers are melting away and hopeful sellers are not getting the offers they will have expected a few months ago.
Whilst the global economic crisis of 2008 caused oil prices to fall faster and further than this time around, the rebound was quick, with prices 'normalising' by mid 2009.
In contrast, we expect to see weak oil prices throughout 2015. Financial pressures will intensify, with two-thirds of the International Oil Companies (IOCs) in our Corporate Service coverage group requiring US$90/bbl Brent to break-even through 2015/16. We expect this to flow through to falling deal valuations and the emergence of a true buyers' market.
And what does the oil price drop mean for corporate spending?
We have analysed the potential for spending cuts in 2015 and estimate a 37% drop in spend will be needed relative to 2014 to maintain current debt levels if Brent stays at US$60/bbl. This is in addition to the US$9 billion cuts announced by companies in the last few weeks.
Operators in an intensive development phase have the least optionality to respond. Most other IOCs have flexibility to rein in spend to keep finances on an even keel but shareholder dividends and distributions – currently 25% of total spend in the sector - are likely to be a significant part of the cuts for some companies.
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