Large scale mergers are on the up.
We have seen Shell’s merger with BG. And the newly announced merger of Technip and FMC.
At a less visible level, many of the smaller and mid-sized service companies have mergers on their radar. Or are being bought by the larger players.
Not only have Schlumberger recently acquired Cameron, but in the last couple of months they have picked up Meta Downhole and ADIL.
As we continue along the path of cost reductions, the industry has firmly entered the consolidation phase. A phase beyond just cutting. More savings are to be made from synergies of scale that can open the door to competitive advantage.
Synergies certainly from reduced personnel, but also in lower procurement and production costs, rationalising central services and leveraging benefit from a wider product or service offering.
We are well into the second year of the down cycle and, still, the optimistic voices of recovery remain barely audible.
So the focus for operators and oilfield service companies alike is to continue on the relentless path of reducing supply chain costs and placing the industry on a sustainable footing for when market stability finally returns.
And for the service sector, we are beyond the stage of talking about when oil prices will recover.
That’s no longer the point. What we need is, admittedly, higher oil prices, but we need them for a sustainable period.
A period of stability is what it will take to encourage the reintroduction of capital and renewal of stalled projects.
Throughout the industry, virtually every business has taken steps to reduce costs and promote efficiencies.
As the demand for services has continued to deteriorate, we have seen a shift from simply cutting costs to companies having to rebuild their businesses from the bottom up.
Starting with a blank piece of paper and putting together the building blocks of a business designed to be competitive in a world of lower demand and lower margins.
And there is no doubt that the consolidation phase will continue as some businesses, under pressure form their banks and stakeholders, will simply not be able to thrive or compete at today’s economics.
The challenge, then, for many owner managers is to find the best possible way to recover the value that has leached from the very business that they have so personally and emotionally invested in over many years.
With imagination (and good advisers), such consolidations can work on a cashless basis and without the need to further stress a company’s balance sheet with more debt.
Share for share deals offer a potential route to access greater efficiencies through scale, while still leaving the owners with a meaningful stake in the enlarged and more competitively placed merged entity.
The industry is being reshaped to be fitter for the future. And we expect the trend for consolidation to continue for a while yet.
Jamie Stark is a partner at Burness Paull LLP
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