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As the world begins to carefully re-open in response to improving COVID-19 numbers and successful social distancing measures, the focus for the oil and gas industry starts to shift from survival to opportunity. While commodity pricing and demand are still low, positive indicators in the market and the world at large suggest that the time for countercyclical M&A activity may soon be upon us, if it isn’t already.
At the height of the pandemic, it made sense to put M&A on hold, even if you were one of the few fortunate companies best positioned to weather the storm. The uncertainty in a market where oil ranges from over $60 a barrel to under $0 within one fiscal quarter made it too difficult for buyers and sellers to get together. As Brad Corson, President and CEO of Imperial Oil put it in a first-quarter results call, “at these extreme points in the cycle, it can be very difficult to transact because buyers’ and sellers’ expectations become very different. (Their) view of what recovery might look like and the timing for that is often very different.”
But as we get closer to recovery, we also get closer to the sweet spot of opportunities, where proactive producers will find opportunity with undervalued assets in a buyer’s market. According to Paul Clark, Manager of Land and Business Development for Bounty Developments Inc. “Now is a good time to plan for our company’s future by broadening our land and interest base. We are looking to acquire working interests, royalty interests, leasehold and freehold mineral rights and are able to move quickly and provide competitive offers if you would like us to evaluate your opportunity”.
Most observers agree that the stresses on the industry caused by the pandemic will lead to a surge of merges and acquisitions, so the questions become how to be ready for that surge, and can you get ahead of it?
Being ready means that M&A research and activity can’t wait until things improve. Just as multiple global catastrophes were impossible to anticipate, so too will it be difficult to pinpoint when the recovery has opened up opportunities. To succeed, your team must be ready and have all necessary data and resources at its disposal. Getting value out of M&A at this point in the downturn will require not only a solid strategy, but also flawless planning and execution.
Things organizations should be doing to get ready for M&A opportunities include:
- Determine your criteria for the ideal purchase – is it based on area, play type, production characteristics etc.
- Identify properties/companies that are currently being marketed publicly and quickly eliminate bad opportunities while moving forward with good ones.
- Decide whether or not you want to compete with others or try to proactively seek an acquisition that is outside of the public domain
- Assuming you decide to look beyond opportunities that are “for sale”, you will not have the benefit of a dataroom at first, so will need good information about the asset.
- Evaluate assets using a thorough look at production (current and potential), future liabilities, partners and their financial stability, proximity to infrastructure and other upside potential possibilities not recognized.
In order to execute on your acquisition strategies, it’s important to have access to data. Obviously, the more comprehensive the dataset, the easier it will be to vet opportunities against each other. The easier it is to manage that data, the more opportunities you will be able to screen and evaluate. We often hear clients talk about acquisitions being a game of numbers… the more doors you knock on, the higher your chance of success.
At XI, we’ve seen an uptick in usage in our M&A data tools and conversations with new clients looking to increase their M&A activity in recent weeks. Some are optimizing their processes to best strategize for future development while others are pursuing deals now, looking to capitalize on their relatively strong positions to find hidden value. M&A season is coming, perhaps faster than we expected. The companies who succeed will be the ones who used this downtime to prepare and optimize their operations.