“Whilst the oil price decline has undoubtedly hurt all Exploration and Production companies, large companies with diverse portfolios and relatively cheap and easy access to capital have performed better than those much smaller companies. Internationally focussed mid-caps are seeing their share prices erode by over 50% on average, compared to a reduction of 30% for the majors. As a result, mid-caps are now focussed on cost management and the debt/equity markets.
“Any failure to adequately address costs and capital structure may result in distressed asset sales or corporate consolidation, especially if oil prices remain low or moves even lower.
“Larger companies also need to address cost and cash flow, and have begun to do so with industry wide capital expenditure and job cuts, although ultimately, they are in a position to manoeuvre much more strategically.
“The limiting factor preventing a large uptick in M&A, is the uncertainty on oil price and the lack of a market wide consensus on the timing of its stabilisation and/or recovery. Once all parties have a common view on forward pricing curves, the valuation gap on assets should diminish and deals can be negotiated at a sensible level.
“This will be crucial for more junior and indebted companies, who arguably already feel the pressure on their business models, as they seek financial or corporate solutions. However, with increasing production in Iran, Saudi Arabia and the US further depressing the price, companies may be forced to act sooner rather than later and agree on lower valuations in order to get deals done.”
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Simon Chan, KPMG Corporate Communications
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KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a turnover of £1.9 billion in the year ended September 2014. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 162,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.