Sustained, low oil price regimes have in the past led to mergers and acquisitions in the oil and gas sector. During the 1990s for example, when oil prices fell to as low as $10 per barrel, mergers and acquisitions such as Chevron (CVX) and Texaco, BP (BP) and Amoco, Total (TOT) and Elf, Exxon (XOM) and Mobil, among others were realized.

Crude oil prices fell by an average of more than 50% between June and December of 2014. Although they have since recovered, they are still more than 40% lower than last year’s highs. The impact of that price slump on the oil and gas industry has however been quite severe: among others, more than 120,000 jobs have been lost and spending cuts have been in excess of US$114 billion.

With substantial financial and other resources,the major Integrated Oil Companies, IOCs, have outperformed other groups in the current oil price regime. For example, their downstream (Refining and Marketing, R&M) performances have countervailed upstream (Exploration and Production, E&P) losses.

Among the tight oil (and mostly E&P) operators, the impact of the oil price slump has been more severe. In this group are the shale and oil sands producers in the United States and Canada respectively. In addition to the higher production breakeven prices, many in the group are saddled with high degrees of financial exposure. They had borrowed heavily against their assets to finance operations; but with the oil price slump, the values of those assets as well as production revenues have tumbled.

If low oil prices endure, some of these companies may invoke second-tier adjustments; this could enable companies with great financial muscle and complex, higher-cost operations to acquire quality assets at low prices. Viewed in the light of current market fundamentals, global oil price rebound would most probably be slow and protracted.

Fundamentals

Growth in oil demand has lagged that in supply. According to the current issue of BP Statistical Review of World Energy for example, growth in global oil consumption was 0.8% while that in supply was 2.3%; and Goldman Sachs Group expects this year’s oil demand growth (1.5%) to lag that in supply (1.7%).

Global demand outlook for the near-term is expected to be sluggish; China, a principal driver for global energy demand is projected to see its slowest economic growth rate since 2008. The International Monetary Fund and World Bank have both projected slow and tenuous global economic rebound in the near-term.

This weak demand profile is compounded by increasing global oil supply. Saudi Arabia, Russia and the United States are all producing at multi-year peak or near peak levels, while Iran ― with a potential sanctions-busting deal with Russia and China ― as well as Iraq, are prepping to open production taps from their massive reserves. In its most recent meeting held last week, Organization of the Petroleum Exporting Countries, OPEC, resolved to maintain output at current levels, in spite of the current supply glut. The group has been pumping above its professed allocation levels since the beginning of the year; and some of the Middle East producers ― which are currently adding production capacities ― have production breakeven prices between US$10 and US$20 per barrel compared to between US$40 and US$110 per barrel for the tight oil producers.

A steep, global oil price rebound is therefore unlikely, and sustained, triple-digit prices, even much farther afield.

Mergers and Acquisitions (M&As)

In spite of the current low oil price regime, mergers and acquisitions in the oil and gas sector have been comparatively few. According to Evaluate Energy, merger and acquisition deals declined 79% year-on-year in 1Q 2015. The attribution has been to a market standoff where buyers await price floors while sellers remain unwilling to sell at prices they consider inadequate.

That said, low oil price regimes offer windows for structural adjustment. Goldman Sachs, in an analysis utilizing operational breakeven oil prices and net debt-to-capital employed ratios, recently compiled a list of potential buyers and targets in the current oil price regime.

Among potential buyers are National Oil Companies, NOCs, as well as IOCs, which, with massive financial assets often operate complex and higher-cost projects. The Chinese government is currently availing itself of the current low price regime to ramp up its strategic crude oil reserves; it has also expressed interest in acquiring ― probably through PetroChina and CNOOC ― assets to bolster its future energy demand. ExxonMobil has expressed interest in acquiring assets to improve its reserves. Total, however, in the wake of the US$70 billion bid by Royal Dutch Shell for BG (RDS-A), has stated that it is in no hurry for M&A activities. Gazprom (GZPFY), due to sanctions arising from its annexation of Crimea, may find regulatory restrictions in any bid for United States, Canadian or European Union assets. While BP is listed as a potential buyer, discussions abound about the company itself being a potential target of larger rivals. However, regulatory scrutiny in addition to nationality and corporate hurdles may militate against such a deal.

Among potential targets, Tullow Oil (TUWLF), with its assets and track record of profitability has been one of the most bandied. Tullow Oil, Premier Oil (PMOIY) and Gulf Keystone Petroleum (GFKSY) all hold some quality assets, some of which are recent discoveries; however, global oil prices will most likely determine their ability to exploit them. Gulf Keystone Petroleum and some others have had profitability or valuation issues and may present amenable bid margins.

All said, most analysts expect significant M&A activity in the current price regime; some expect it to be slow and selective, and others, frenzied.