How will increasing M&A activity affect oil and gas professionals?
It has never been harder for exploration companies to keep up with the growing demand for oil and gas.
According to the most recent Oil Market Report published by the International Energy Agency (IEA), an extra 1.4 million barrels per day will be required to satisfy the global need for oil in 2014. Although supplies increased last year, it is becoming far more difficult for businesses to extract enough oil to meet demand.
Wells are drying up quickly and firms need to explore alternative sources. While a number of potential oil fields have been identified, these are proving to be extremely hard to dig, as they are much deeper than existing sites. This means organisations have to use the very latest technology and hire the most experienced engineers and technicians in order to tap these wells.
There has been a great deal of debate surrounding skills shortages in the engineering field and this is having an adverse effect on oil and gas corporations. They must pay a premium to attract the best talent, and with so many oil companies looking for new workers, competition is fierce.
Are mergers and acquisitions (M&A) the answer?
It is no coincidence that more firms are getting involved in joint ventures or M&A activity as oil becomes more difficult to source. A recent study by KPMG showed that oil and gas executives are expecting a sharp rise in the number of mergers and acquisitions being completed in 2014, with companies in the US, Western Europe and Asia predicted to be particularly busy.
As many as 56 per cent of the 100 people who took part in the survey said their firm would attempt to take over another business this year, while 39 per cent expect to see a divestiture. The report suggested that "mega-deals" involving the very biggest corporations will be minimal and the vast majority of M&A deals will be completed by middle-ranking companies.
There are many things to consider when lining up a takeover or merger and KPMG's study underlined the main reasons for this predicted upswing in activity:
- 56 per cent of executives have a desire to consolidate core businesses
- 52 per cent want to gain access to new technology
- 35 per cent are looking for geographic growth
- 18 per cent want product and service growth
- 13 per cent want to increase their customer base
These results are intriguing, as they show that relatively few businesses are looking to initiate a merger or acquisition in order to reach new customers. The fact that most executives want to consolidate their core businesses or join forces with an organisation that has access to state-of-the-art exploration technology suggests that the main challenge facing oil and gas companies at the moment is not finding people to sell oil to, but finding enough oil to sell.
Why mergers, acquisitions and joint ventures are not always easy
It would be a mistake for companies to think that mergers, acquisitions and joint ventures are a foolproof solution to their problems. The KPMG study highlighted some of the obstacles that companies face in their attempts to join forces with other corporations.
- 38 per cent of executives believe uncertainty in the regulatory market is the biggest barrier to M&A activity
- 37 per cent said value disparities between buyers and sellers are the most pressing concern
- 36 per cent cited fluctuating energy prices as their most difficult challenge
- 28 per cent felt an inability to predict future performance dissuades companies from merging with others
Tony Bohnert, KPMG's Energy Sector Lead Partner for Transactions & Restructuring, commented: "The gap is still wide between what buyers are willing to pay for producing assets and what sellers think they are worth. Many buyers do not see an upside to paying a premium for properties already in production, and instead are setting their sights on early stage assets."
Even when a merger, acquisition or joint venture has been successfully completed, problems can still arise. There are an increasing number of projects that are being run by numerous businesses from across the globe and there are examples of one single oil drilling venture bringing together a firm from the US, one from Western Europe, one from the Middle East and one from Southeast Asia.
While this type of arrangement brings many benefits, including the sharing of knowledge, finances and technology, there are also plenty of drawbacks. Corporations in the West often operate in a very different way to those in the East and this can create internal conflicts, as everybody has their own ideas on the best way to take the business forward. Disputes can easily spiral out of control and can seriously hinder progress.
In spite of all the potential problems, Mr Bohnert still believes that oil and gas companies see mergers and acquisitions as a great opportunity.
"Although long-term market uncertainty has kept Chief Executive Officers and Chief Financial Officers focused on cleaning up their portfolios in recent years rather than exposing their companies to significant risk with large-scale deals, an increasing pursuit for M&A opportunities could be on the horizon," he added.
What does this mean for oil and gas professionals?
As has already been discussed, the growing demand for oil on a global level - coupled with the increasing difficulty of extracting the resource - is forcing companies to hire professionals who have a vast amount of experience in the industry. This obviously works in favour of talented engineers and project managers, as they can expect to receive far better remuneration packages than they have done in previous years.
However, project workers will need to adapt if they are to secure the very best jobs. The oil and gas industry has always been globalised, but this is particularly true now that businesses from all over the world are forming partnerships. This means specialists have to be flexible, as one month they might be working in Singapore and the next their services could be required in the US.
Corporations often join forces with others in order to widen the talent pool available to them. This can take some of the power away from workers, as companies in their homeland can suddenly find it much easier to hire talented individuals from their partners' country of origin. Oil and gas professionals who are unwilling to move elsewhere could find themselves being overlooked for high-paid roles, even if they have more experience and skills than other candidates.
Why you should consider Southeast Asia
Although the US, Western Europe and China are expected to dominate when it comes to oil and gas mergers and acquisitions in 2014, there are also a number of intriguing deals taking place in Southeast Asia - a region that Michael Bailey Associates is very familiar with. One recent deal that stands out involved Malaysia-based
M3nergy, which launched a joint venture with Indonesian organisation PT Transamudra.
Overseen by international law firm Watson, Farley & Williams, the deal will see the pair finance a floating production, storage and offloading facility named FPSO Ratu Nusantara. This is an important first step into Indonesia for M3nergy and this is an expanding market that contractors should be tracking.
Singapore and Malaysia are also home to a plethora of increasingly influential international petrochemical companies and the Asia-Pacific region is expected to increase its oil output in the coming years. There have been some significant discoveries in recent months, with Petronas being particularly successful, and this means plenty of opportunities are likely to open up for people who are on the lookout for high-paid jobs.