The Impact of Declining Oil and Gas Prices on Mergers and Acquisitions in 2015-2016: Internal and External Factors

Table of Contents
1. Introduction:........................................................................................................................2
2. Internal and External factors that influenced Oil and Gas Industries to use Merger and
Acquisition strategy during 2014-2016......................................................................................2
2.1. External Factors:..........................................................................................................2
2.1.1. Oil Price Dropping:..............................................................................................2
2.1.2. Rapid production of Oil in massive amount:.......................................................3
2.1.3. Development of Energy Efficient Cars:...............................................................3
2.1.4. Lifting of International Sanction placed on Iran:.................................................3
2.2. Internal Factors:...........................................................................................................4
2.2.1. Oil companies going bankrupt:............................................................................4
2.2.2. Negligence:..........................................................................................................4
2.2.3. Competition among companies:...........................................................................4
2.2.4. Wrong Perception:...............................................................................................5
3. Merger and Acquisition strategy used by Oil and Gas Industries during 2014-2016........5
3.1. Introduction:................................................................................................................5
3.2. One of the Biggest Acquisition of the decade came in year 2015: Royal Dutch Shell
bought BG Group:..................................................................................................................5
3.2.1. Benefits of this Acquisition for Royal Dutch Shell Plc:......................................6
3.2.2. Challenges of this acquisition to the merger (Royal Dutch Shell PLC):.............8
3.3. Noble Energy Acquisition of Rosetta Resources:.......................................................9
3.3.1. Benefit of this deal to Merger (Noble Energy):.................................................10
3.3.2. Challenges of this deal to the Merger (Noble Energy):.....................................10
4. Summary:.........................................................................................................................11
5. References........................................................................................................................11

1. Introduction:
The intense fall of both natural gas and crude oil prices across the year 2014-2015, joint with
a high level of ambiguity about their future curve challenged oil and gas merger and
acquisition (M&A) activity in 2015. Crude oil prices began the year 2015 at US$55 per barrel
which declined sharply to US$37 per barrel by December that year. This was the lowermost
level since 2004. The natural gas prices also shared the same story. Since the production of
crude oil continued to overtake need of consumer by 2 million barrels per day and also there
is no clear sign when the global oil and gas market will rebalance, prices of crude oil and
natural gas have been continuously declining (Ernst & Young Global Limited, 2015).
This severe decline in oil prices in 2014 has put a discouragement on many big energy
companies. Having said that, this has not kept these companies from mergers and acquisitions
activities (Mattioli & D, 2015).
2. Internal and External factors that influenced Oil and
Gas Industries to use Merger and Acquisition strategy
during 2014-2016.
Merger and Acquisition activity in the oil and gas industry might recover its drive mainly by
big energy industries looking for some method of “reset”. This could be through financial
recapitalizations, asset sales, restructurings, and other forms of monetization. Also, these big
companies with the financial capability are looking to hunt inorganic growth opportunities at
reduced values, and are looking for synergistic merging (Deloitte Center, 2014).
2.1. External Factors:
2.1.1. Oil Price Dropping:
Crude oil prices began the year 2015 at US$55 per barrel which declined sharply to US$37
per barrel by December that year. This oil prices was over US$100 a barrel in mid-2014 has
fallen dramatically below $27 by February 2016. Not only crude oil but there is a significant
price drop in natural gas prices, which are near 14-year lows (Egan, 2016).

Figure 1: Crude Oil Price
(New York Times, 2016)
2.1.2. Rapid production of Oil in massive amount:
North American internal production of oil and gas has almost doubled over the last several
years. This has allowed countries like United States to reduce and even stop oil imports.
Saudi Arabia, Algeria and Nigeria were once selling their oil in the United States is now
rapidly competing for Asian markets. This competition between the oil producers have also
forced to drop oil prices. Canada and Iraq are increasing their oil production and exports of
these oil are growing year after year. With all their economic problems, Russia is still able to
manage to keep producing oil at record levels (New York Times, 2016).
2.1.3. Development of Energy Efficient Cars:
One of the factor for demand of oil being reduced can be modern technologies and energy
efficient design. Thus, even though the economies of Europe and many developing countries
are considered weak, the vehicles that run on the road are becoming more energy-efficient.
So demand for fuel is lagging (New York Times, 2016).
2.1.4. Lifting of International Sanction placed on Iran:
One of the other external factor for this can be lifting of international sanction set on Iran.
The effect of international sanctions set on Iran, caused Iranian production of oil to reduce by
around one million barrels a day in recent years. This sanction also obstructed Iran from

buying the latest international oil field technology and equipment. With this sanctions now
being lifted, the oil industry in Iran is also actively participating oil and gas production (New
York Times, 2016).
2.2. Internal Factors:
2.2.1. Oil companies going bankrupt:
There was a time, when oil prices were comfortably in the $90 to $100 a barrel and this is the
time when shale oil boom took off in North America. With the shale oil production booming,
oil and gas companies took on loads of debt to fund these expensive drilling for finding oil
and gas. But the subsequent flood in U.S. oil production created an epic supply surplus which
has now caused crude oil prices to crash badly (Egan, 2016).
Because of this, revenues have dropped. This has also choked off cash flows and making it
challenging for companies to pay off all their debt. To deal with this situation, oil companies
have countered by cutting jobs and reducing spending. Even though, some of the more
leveraged companies have been forced to the option of bankruptcy (Egan, 2016).
2.2.2. Negligence:
The Oil companies around the world, neglected the price drop in early 2014 and they thought
it was not a long term (England, 2016). This negligence from Oil and Gas companies
regarding the initial price drop lead the price to drop further and the companies to panic and
develop strategies such as Merger and Acquisition.
2.2.3. Competition among companies:
OPEC countries started to compete with US oil industries to take over the Asian market.
Also, this competition lead to the production of oil in a very high volume from both side.
This growth in production allowed the price of oil to drop and ultimately, the companies that
were producing had to suffer from loss. Also, in April 2016, Exxon company had
reported record low quarterly profits, and they were, therefore, recently stripped of its top
AAA credit rating (KRAUSS, 2016).