OFFSHORE TECHNOLOGY CONFERENCE, HOUSTON�The consolidation trend in the upstream oil and gas sector is likely to continue through at least the first part of the next decade, because the drivers for merger and acquisition activity remain mostly the same as in the 1990s, says Scott B. Gill, co-head of research for Simmons & Co. International, Houston.
Speaking at the Offshore Technology Conference on Monday, Gill said the main rationale for mergers and acquisitions is clear: "Everybody is focused on returns, and returns over a long period of time." Those who produce less return than the market demands will likely be merger targets, he said.
He divided the upstream sector into three main groups�major oil companies, independents, and service companies�and elaborated on the different drivers for M&A activity in each.
For majors, the major reason to merge is cost reduction, says Gill. For independents, the goals are reducing costs, eliminating price-swing sensitivity, and fighting depletion. And for service companies, they are reducing price volatility, improving capital discipline, and leveraging infrastructure, as well as the idea that consolidation should yield better capital investment decisions.
Gill concluded that M&A activity will continue in the upstream sector. He sounded a warning note, however: Although returns are the rationale for M&A activity, without growth, returns mean nothing.