Can Big Mergers Brace Energy Players Amid Low Oil Prices?

The drop in oil prices is now a continuing story. After roiling the equity market for over a year, the series of drops in multi-year low crude price is now forcing major energy players to think and rethink their production plan just to survive an unfavorable business scenario. Even defensive measures haven’t helped, as these merely mean compromising on operations. In fact, most of the energy companies have a huge debt burden that they can’t write off as cash flows from core operations aren’t enough.

In such a situation, many energy players are merging with their rivals for synergies in the hope of broadening their scope of operations even though business is not in their favor. As per Dealogic, 2015 has seen $323 billion in declared oil and gas company mergers so far. Most importantly, mergers between oil and gas companies have boosted the world-wide deal volume this year to $3.2 trillion, setting 2015 on the course of breaking the $4 trillion plus deals’ record in 2007.

Are the energy companies doing the right thing at right time? If yes, then how?

Factors Driving Mergers

A synergy takes place when the combined value of two companies is more than the sum of the individual value of the firms. Almost every time companies opt for a merger only when they see opportunities for synergy. Most importantly, the business environment is the main driver of mergers and acquisitions.

In this article, we will discuss the reasons behind the record energy company mergers that have taken place this year. Definitely, the primary driver is the plunge in oil prices. So let’s first analyze the reasons for this oil carnage.

During 1990 and early 2000, the U.S. was more dependent on crude import as domestic demand was far above its conventional oil supply. But with the invention of new techniques like hydraulic fracturing and horizontal drilling, U.S. shale producers relentlessly ramped up oil production. Eventually, owing to its huge scale of crude output, the U.S. started relying less on oil import.