As low oil prices settle in for a while, merger and acquisition (M&A) transactions are becoming more common. Smaller companies are being bought by their bigger peers, and large companies are merging to help keep each other afloat.
But make no mistake, it’s not just onshore oil and gas companies that are being affected. Offshore drillers are feeling the heat too.
The world’s largest oil services group based on market capitalization is Schlumberger (NYSE:SLB), and this oil giant is planning to buy out Cameron International (NYSE:CAM). The oil and gas equipment manufacturer made 62% of its revenue on offshore projects last year, a big selling point for the company.
Credit Suisse’s global head of oil and gas Osmar Abib said, “As oil production becomes more complex, it becomes more and more important for service companies to have the right skills and capabilities…”
You see, in a time of low prices, cutting costs is key. To do that, companies need skilled and knowledgeable workers and teams to come up with cost-cutting solutions.
M&A is one of the best ways to do this in a low-price market. Companies combine their individual specialties and form one multi-faceted company.
In the case of offshore drillers, the low-oil market is hitting hard. The average price for production offshore is around $53 per barrel. But with oil dropping as low as $39 per barrel in the U.S. recently, you know this means a loss for many producers.
What’s worse is that new projects, including newly built and delivered rigs and ships, can bring production costs up to $70 per barrel, a price that oil likely won’t see in the immediate future.
This need to cut costs as much as possible has led larger companies like Transocean (NYSE:RIG) to cut investor dividends temporarily, which saves money in the short term but may reduce investment. Others like SeaDrill (NYSE:SDRL) have kept dividends, but pushed back new equipment deliveries in hopes that oil prices would recover and make new projects more affordable.
In lieu of this, Schlumberger hopes to integrate Cameron’s products and services to increase production efficiency while reducing company spending on outside equipment.
And even bigger M&A’s are on the horizon: Halliburton (NYSE:HAL) bid $38 billion for Baker Hughes (NYSE:BHI) in November last year, and General Electric (NYSE:GE) was planning a new oil and gas division of its company before that.
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Until next time,
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