Glacier Media's Evaluate Energy analyzes Q2 activity

The total global spend on upstream M&A deals rose an encouraging 38% in the second quarter of 2016, driven by improved oil prices and market confidence.

That is among the findings of a review of the second quarter, which ended June 30, by Evaluate Energy, a leading global energy data company owned by Glacier Media.

During this period, oil exceeded US$50 a barrel during Q2 – the first time it has done so since July 2015.

“This is clearly a principal driver of M&A activity; should prices continue to rise, we would anticipate deals to follow,” said EE analyst Mark Young, who is based in London, UK.

Q2 upstream deals were worth a combined US$25.6 billion, according to EE’s latest data, compared to US$18.5 billion in Q1.

“Yes, banks remain wary of over-committing on oil assets, but several companies are acting now rather than waiting for further rises in prices and asset values. Looking ahead to Q3 and Q4, we are cautiously optimistic for M&A activity levels,” added Young.

“During the past year, much-reduced oil prices have eroded balance sheets of many companies. This could hamper deal flow in the short-term, as affected companies may need to prioritize debt reduction over acquisitions.

“How the oil price performs will be key. While $50 oil makes most producing wells profitable on a marginal basis, in terms of actually developing a well and extracting an appropriate level of profit, it’s unlikely that current prices will open up enough of the market to result in a dramatic increase in M&A activity.

“Nonetheless, prices have reached a level where oil can now be hedged for profitable marginal operations and allow for cash to action an M&A strategy. This should bode well for Q3 and Q4.”