How Have Plummeting Crude Oil Prices Impacted Merger And Acquisitions In The US Oil And Gas Industry?

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The commodity down cycle that began in July 2014 is believed to have disrupted the valuation of all the companies in the oil and gas value chain. As a result, the merger and acquisitions (M&A) in the industry is expected to have gone up, according to popular market belief. While we agree with the fact that the weak price environment has deteriorated the value of many oil and gas companies, we believe (based on the data in the table below) that this may not necessarily warrant the consolidation of the industry.

In the table below, we present crude oil price data and the number of M&A deals that have taken place for the last 5-6 quarters. On a closer look, one can deduce that the change in M&A activity in the oil and gas industry is positively correlated to the change in commodity prices, particularly the crude oil price, and moves in the same direction as the movement in crude oil prices. Based on the data, we calculate that the change in M&A transactions and the change in crude oil price have a positive correlation of around 80%. By this we mean that if crude oil prices drop by say 1%, the M&A activity in the oil and gas sector is likely to go down by 0.8%. However, one cannot rule out the possibility of company specific factors and other macro factors which could boost the M&A deals even in a weak price environment.

M&A-O&G

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for ConocoPhillips

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