Mergers and acquisitions in oil and gas

1Mergers and Acquisitions in Oil and Gas
Mergers and
Acquisitions
in Oil and Gas
The fall in oil prices will trigger
a new wave of M&A in 2015

Turbulence in O&G
Remember in 1998 when oil prices hovered around $20 a barrel and oil companies were
flourishing? The severe price drop between then and the 1999 low of $10 a barrel ushered
in a wave of mergers to gain economies of scale, creating the super majors of today: Exxon
and Mobil in 1998; BP, Amoco, and ARCO in 1998 and 1999; Total, Petrofina, and Elf in 1999
and 2000; and then Chevron and Texaco in 2000.
Fast forward to the three years from 2011 to June 2014 when oil prices found a new level at
around $110 per barrel with less volatility—some would say abnormally low—with the odd
hiccup caused by geopolitics (see figure 1).
Many things have changed since 1998. Demand has shifted east, companies are finding and
developing more challenging and higher cost fields, and most recently, the U.S.-led shale
revolution and its stealthy, growing impact on supply has the United States now producing more
than nine million barrels a day. Although oil prices rose by $90 per barrel, margins in the industry
have not. So a >50 percent price drop now is likely to have a bigger impact than the drops in 1999
or 2008.
Costs have been high, and with the price of oil now under $50 a barrel in January 2015—and
some betting it could fall below $40—pressure will be intense for industry leaders to have
a clear M&A strategy. Several questions are key for the year ahead:
• How long will prices need to remain low before companies need to adjust to new realities?
• Will there be a new wave of mergers to capture scale or selective acquisitions
to strengthen portfolios?
Henry Hub
($ per mm BTU)
Brent
($ per bbl)
Note: mm BTU is million metric British thermal units.
Sources: Bloomberg, December 2014; A.T. Kearney analysis
Figure 1
Oil price movements
0
2
4
6
8
10
12
14
0
20
40
60
80
100
120
140
2003 2007 2009 2013 201520011999 2005 20111995 1997
07/9807/9701/97
$24
$10
01/98 01/99
Brent ($ per bbl) Henry Hub ($ per mm BTU)
Month average per bbl
$107
$56 on Dec 31st
01/14 04/14 07/14 10/14 01/15
Month average per bbl

• When is the best time to move? How soon will the window close? Will early movers
capture strategic advantage as the competitive landscape changes, or will more prudent
fast-followers do better?
• Who has the strength to acquire, and who will be acquired? Are divestments a good option
to provide needed cash flow over the coming quarters? Which criteria should guide the
position and assets to sell?
Within this context, we performed a study to determine how the market might evolve and what
impact market turbulence will have on different groups of companies (see sidebar: About the
Study on page 16). Our findings suggest a business environment that is likely to present some
angst as well as significant opportunities for those willing and able to adopt contrarian strategies.
M&A deals—whether acquiring, partnering, or divesting—will play a big role in shaping
businesses to grow value and navigate the new, more turbulent landscape. The winners will
be those firms that anticipate potential outcomes, choose how and when to act, and under-
stand how these decisions will impact their positions and competitive dynamics.

Contents
Executive Summary 5
M&A in 2014 6
M&A Outlook for 2015 7
Outlook for Oil and Gas Sector Participants 8
Independents 9
International oil companies (IOCs) 13
National oil companies (NOCs) 15
Oil service companies 16
Financial investors 18
The New Competitive Landscape 19
About the Study 16

Executive Summary
Mergers and acquisitions (M&A) in oil and gas showed a strong recovery in 2014 after a sluggish
2013, with North America remaining the most active region and upstream again being the most
active sector. So what will drive M&A activity in 2015, and which companies will prosper?
Oil and gas supply has been building for some time driven primarily by U.S. shale, while geo-
political challenges and escalating costs for more complex projects have made life difficult for
producers. These factors have all contributed to an industry that is about to embark on a very
challenging year. The recent plunge in oil prices, prompted by OPEC’s production decision,
looks structural. This has triggered what is likely to be a new wave of M&A activity across the
entire value chain. Those with strong cash flow and healthy balance sheets will have significant
opportunities, while others will require new strategies just to survive.
The significant structural changes and sudden drop in oil prices in 1998 led to consolidation of
the major international oil companies (IOCs). This time, industry executives are skeptical that
such mega deals will be so prevalent when most have sufficient scale advantage. But never say
never. In 2015, we expect many industry companies to be active in M&A as part of the response
to margin squeezes and lower oil prices.
Independents. Balance-sheet strength and varying levels of exposure to assets with higher
breakeven oil prices will determine the winners and losers as the margin squeeze takes hold.
We also expect more adventurous financial investors to take the opportunity to enter.
International oil companies. Optimizing portfolios will continue to be the focus. Divestment
of downstream and non-core assets could accelerate to enable funding of targeted upstream
activity and meeting cash flow needs throughout 2015. Mega deals for scale synergy are not
out of the question but will be limited, if at all. IOCs will favor selective acquisitions to build in
their chosen areas.
National oil companies. M&A activity will be aligned with the national agenda of their host
government, which is often strongly influenced by near-term domestic needs and politics as
much as by economics and business strategies. Many have the financial strength to play a
significant M&A role, and some are expected to be more active in 2015.
Oil service companies. These companies will continue to be hit hard as operator margins
are squeezed and the pain is shared with service providers. There is significant potential for
consolidation from mega deals through to the fragmented sub-segments. Financial investors
with capital to invest will continue to be very active, plus new entrants with deeper pockets—
such as large engineering companies—could make strategic moves.
Financial investors. There is plenty of capital looking to be invested in the industry, but the
current margin squeeze, low oil prices, and sluggish demand could suppress some investors’
appetites. It will take confidence to capture the best opportunities. Investors will certainly
acquire in the oil-field services sector, downstream divestments by IOCs, and for those still
brave enough, some upstream assets beyond the traditional mature production.
For those with cash to invest, 2015 will offer great opportunities for countercyclical moves
to buy attractive assets. Well-targeted acquisition strategies will provide stronger, higher
value growth than the frontier and other previously planned expensive exploration. With debt
pressures mounting and many independents’ share prices falling, some of these assets will
be a good value. The window of opportunity may be smaller than expected, once oil price

expectations settle enough to bring buyers and sellers together. So now is the time to be clear on
the best options to address the new industry outlook and dynamics.
A lot will happen in the year ahead. For some, the shakeout will be painful, but for those in the
driver’s seat, it is a rare opportunity to reshape the competitive landscape to their advantage.
The sands are shifting, and all companies will need to be clear on their strategies to thrive—or
even to survive—in 2015.
M&A in 2014
The 2014 M&A market showed strong recovery from a sluggish 2013, with year-to-date (January
to November) deal volume of about 1,800 and deal value of around $440 billion already
surpassing last year. The first half of 2014 showed signs of a rebound with total deal value rising
24 percent above the same six months in 2013. Many large deals (more than $10 billion)
upstream, midstream, and downstream were announced during the year.
North America remained the most active region—with more than 65 percent of deal value in
2014 compared to 44 percent in 2013. This could be the result of companies’ efforts to
restructure and streamline their portfolios and a stronger focus on U.S. shale. The Asian market
also showed a rebound, with transaction value increasing by more than 65 percent from 2013.
Upstream remains the most active sector, with the value of deals rising 13 percent (see figure 2).
Downstream deal value increased—by a striking 100 percent—as companies started addressing
some longstanding portfolio issues. Midstream transaction volume dropped by around 30 percent,
but deal value doubled, driven by a few large deals. The upstream sector has increased its domi-
nance in deal volume, now representing more than 64 percent of oil and gas deals so far in 2014.
Transaction value by O&G target
($ billion)
Sources: Dealogic and Thompson; A.T. Kearney analysis
Figure 2
Oil & Gas transactions by target sub-industry (2009-Nov 2014)
Transaction volume by O&G target
(number of deals)
Downstream
2009 2010 2011 20132012 2014
YTD Nov
Midstream
Non oil and gas
Oil service providers
Upstream
Utilities (gas and electric)
2009 2010 2011 20132012 2014
YTD Nov
1,826
2,017
2,4182,5812,398
2,072
338
463
383
414
282
440

Despite the uptick in activities, deal volume was still about 25 percent below the 2012 peak.
Asian and Caspian national oil companies (NOCs) and sovereign wealth funds have been the
biggest buyers in recent years. The quieter buying activity since 2013 comes partly from these
national companies being more focused on progressing and developing the big inventories of
assets and positions they have already acquired as well as from lower returns since costs have
escalated, even before oil prices fell.
M&A Outlook for 2015
Oil price uncertainty could slow M&A in the near term, but then a new wave of deals
will surface
Our discussions with industry executives confirm that recent oil price volatility will put the
brakes on deals. When prices settle and valuation expectations between buyers and sellers
converge, companies that already have short lists of what they want to buy will start moving to
capture these key assets. Because deals tend to be under discussion and in the works for
months, there will be a short lag before activity picks up again. Most companies are rapidly
exploring how to address intense cost pressure, and M&A strategy is a crucial part of the
solution for many.
“Oil price volatility will put a brake on deals
until price settles… expect significant
M&A activity as a response to sustained
low oil prices.”
—Industry executive
Plunging oil prices are creating both uncertainty and opportunities
By early January, oil prices had dropped by more than 50 percent from their stable range of
$100 to $110 per barrel for the three years up to June 2014, with Brent prices falling below
$50—levels last seen in 2009.
M&A transactions are propelled by industry dynamics. Plummeting oil prices caused by growing
supply—most notably from shale producers in the United States and slowing demand in Asia and
Europe—have changed these dynamics dramatically over the past few years. Lower oil prices are
creating intense cost and cash-flow pressure. Participants across the industry know that a clear
M&A strategy is a key part of the response needed to weather the storm and for the strongest to
take advantage.
This creates opportunities. The price drop is unlikely to last forever, and opinions of how long
this will last are sharply divided. One CEO said, “Buyers need to be brave and go countercyclical
as the next 18 months will be fairly unique.” But buyers have become more cautious, even before
the recent price drop. Companies are already trying to shed higher-cost assets in their portfolios.

U.S. exploration and production (E&P) companies, previously net buyers, have become net
sellers of international positions as they focus on domestic shale. China’s NOCs have been busy
digesting and getting more value from their surge of resource acquisitions over the past few
years. Chinese companies bought 4 percent ($5.2 billion) of global assets in 2014, down from
17 percent ($24 billion) in 2013. Similarly, the value of assets acquired by companies from Asia
was down 50 percent ($4.2 billion) in 2014 from what they spent in 2013.
Financial investors such as private equity and master limited partnerships have been particu-
larly active in the United States, offering—against very low interest rates on deposits—a steady
income at relatively low risk from producing assets. Some of these investors may get more
cautious now that the value of these assets has fallen sharply and oil price volatility and risk
perceptions have risen.
“Buyers need to be brave and go counter-
cyclical as the next 18 months will be
fairly unique.”
—CEO, independent operator
The service sector and highly leveraged independents are likely to feel the impact of lower
prices first. For the services sector, discretionary spending is already being cut. For two years or
more, operators have lamented high costs eating into their margins—even with oil prices over
$100 per barrel.
The market is undergoing tremendous change, driven in part by the rise of U.S. shale production.
The focus on reducing costs will increase. Low demand and technology innovation will accelerate
the progressive lowering of breakeven points, especially in U.S. shale basins. Financing,
particularly for those with lower cash flow and higher debt, will become more difficult.
Today’s executives have to deal with more uncertainties and complexity. The new business
environment is likely to present some great opportunities for those willing and able to adopt
contrarian strategies. M&A deals—whether acquiring, partnering, or divesting—will be a vital
way to grow value and navigate the new, more turbulent landscape.
The sands are shifting. Companies that best anticipate and prepare themselves to take advantage
of the fast-moving and volatile situation—as the oil price finds a new balance point for supply in a
more demand-constrained world—will be in a much stronger position than their peers. Those with
a strong cash flow, healthy balance sheets, and the foresight to take first-mover advantage can
make significant strategic gains in what will be a very dynamic competitive landscape.
Outlook for Oil and Gas Sector Participants
The situation and potential strategies will look different for each group in the oil and gas
industry. Figure 3 on pages 10 and 11 offers a condensed view of expected M&A trends,
potential responses, and proposed actions for an array of companies. The following discusses
each group in more detail:

Independents: much lower oil prices will cause a big shakeout for those with high costs
and debt
Diverse in terms of size and focus, independents can be divided into three segments:
• Larger integrated independents: companies with upstream, midstream, and downstream
production, with minimum 100 kboed production or 480 mmboe proven reserves1
• Smaller independents: E&P companies with more than 30 kboed production or more than 160
mmboe proven reserves, or both
• Unconventional-focused independents: companies that are mainly focused on unconven-
tional resources (with unconventional assets covering more than 80 percent of production)
The total reported M&A activity for independents by deal value has grown year on year since
2012, with leading independents and unconventional-focused companies the most active
companies in this sector (see figure 4). This picture is reversed when looking at the number
of deals transacted.
The main driver behind the trend is the gradual reduction of larger integrated independents’
M&A activity over the past three years. Historically, the deals have been dominated by Lukoil,
Mitsui, Inpex, Novatek, and Suncor as acquirers in up to 60 percent of the deals. In 2014, however,
these buyers were largely absent from the market. This is primarily because of domestic political
and economic factors with Russia and other producers, plus Japan facing currency devaluations
and Russia’s sanctions that limit firms’ ability to do deals—at least for now.
By contrast, smaller independents have seen growth in M&A activities—primarily around
shale positions. The most significant deals in this segment in 2014 were Encana’s purchase
Transaction volume
Figure 4
Independent M&A acquisition activities by quantity of deals and value
Transaction value
($ billion)
Unconventional companies Smaller independents Larger integrated independents
120
100
80
60
40
20
0
2012 2013 2014
YTD Nov
2012 2013 2014
YTD Nov
40
64
59
35
30
25
20
10
15
5
0
102
25
27
20
1
Kboed is thousand barrels of oil equivalent per day; mmboe is million barrels of oil equivalent

Independents
National oil
companies (NOCs)
International oil
companies (IOCs)
Source: A.T. Kearney analysis
Figure 3
Analysis of different situations and potential strategies by group
Recent M&A
activities
• Some actively buying mature
or marginal fields sold by IOCs
• U.S. E&Ps selling higher cost,
more difficult international
positions to focus on North
America shale plays
• Most deals continue to be in
North America, with many
smaller deals in Africa, Latin
America, and Southeast Asia
• Increased focus on high-grading
portfolios and growth through
exploration
• Fewer, more targeted
acquisitions
• Selling less profitable
downstream and marginal
assets
• Some companies have made
significant progress in past two
years, others less so
• China: Acquired many resources
and capabilities up to 2013;
pace slowed, became more
selective
• Russia: Active deals within FSU
and some high bids to gain
international positions
• India: Still moving slowly,
despite signaling interest in
buying big resource positions
• Middle East: Limited focus on
buying more upstream
resources, but funds are
available
Concerns and
challenges
• Cash flow is a big concern for
operators with higher cost
positions, especially given
lower prices
• Funding and debt issues are
paramount (plus stipulations and
covenants on oil price hedges)
• Ideally, sell non-core assets,
build cash reserves, put weaker
projects on hold
• Continuing pressure from
financial markets on free cash
flow and dividends
• Cost inflation pressure; 8- to
16-month delays in complex
developments and high-cost
operations
• Different operating model
required to succeed in shale
• Little growth and thin margins
even at $100+ oil prices of early
2014
• China: Focused on digesting
and learning from previous
acquisitions
• Russia: Under sanctions and
in need of partners to provide
capabilities and technology
in Arctic and shale
• Middle East: Most not in need
of more O&G resources; focused
on diversifying and providing
local jobs; costs are a concern
for some
Anticipated
future
situation
• Possible distressed situations
for weaker companies in
a sustained low oil price
environment
• Opportunity for independent
operators with strong financial
positions to acquire
• Cuts in capex; focus on cash
flow and debt
• Some shale firms to dial down
drilling until prices improve
• Shakeout may strengthen sector
with stronger positions; ready
for upturn
• More active portfolio high-
grading, cutting capex, deferring
high-cost marginal projects, and
cutting long-term exploration to
free up cash flow
• Focus on more profitable or
higher value areas and less on
pure volume metrics
• Focus on cash cost—own and
suppliers’—to improve margins
• Larger companies already have
enough scale and so unlikely to
make major acquisitions
• Cost cuts (i.e., staff) could hurt
capabilities
• China: Will consolidate and learn
from acquisitions. Seen as a
potential contra-cyclical investor
for companies in distressed
situations with lower oil prices
• Russia: Currently hard hit. Eager
to acquire—driven by need for
technology and geopolitics
• India: Slow to the game and
looking to catch up
• Middle East: Might seize on
low prices; could control timing
of window of opportunity
Proposed
actions to
consider
• Larger operators: Put weaker
and longer-term projects on
hold before sunk costs rise
• Defer deepwater and frontier
exploration; assess M&A options
and impact on competitive
strengths
• Smaller companies: Strengthen
balance sheets, identify partners
or investors (e.g., PE and NOCs)
• For both: Manage expectations
• Broaden scenario planning to
include new range of oil pricing
and competitor moves
• Pursue M&A where strength
and robust margins are
attainable
• Develop cost optimization
strategies on high-graded
portfolio; improve supplier
management, standardization
• Move early; manage market,
staff, and stakeholder
expectations
• Reconsider partnerships and
joint ventures
• Scan market for targets to
match strategy and needs for
capabilities or technology;
distressed companies in need
of funding could come calling
• Move early to ensure good
timing
• Ensure delivery capabilities;
reduce supplier costs

Oil service companies Financial investors
Recent M&A
activities
• Diverse sub-segments, each
with unique characteristics
• Oil field services (OFS) in
particular characterized by a few
large companies (two of which
are now merging) and many
small companies where
investors (PE firms) are active
• Cases in which larger firms
acquire smaller to capture key
technologies and develop into
viable products
• Technology and engineering
firms expand into the market
• More funds focusing on energy
(e.g., Blackstone, Vine Oil & Gas,
Templar Energy)
• Historically focused on small- to
mid-cap service companies but
starting to buy into assets
Concerns and
challenges
• Severe cost pressure from operators;
quickly cutting back demand
• Lower asset utilization as projects are
delayed or canceled; likely to first hit
drillers and offshore seismic
companies with high fixed costs
• Companies with longer-term
contracts in place may have more
time to adjust
• Cost efficiencies are needed, and
soon
• Industry feedback of funds with
capital struggling to identify and
value suitable investments
• Appreciation of (and strategy
to match) cyclical nature of
industry and need for continual
investment
• Oil price volatility might not
fit the traditional financial
investor model
Anticipated
future
situation
• Potential distressed situations for
smaller, weaker service companies
• Selective acquisition by stronger
companies (including technology
and engineering service firms)
to acquire niche technologies
• Potential consolidation of compa-
nies, merging to increase scale,
reduce costs, and improve
negotiation position with operators
• Continued activities by financial
investors; industry leaders note
potential challenges of over-
valued deals by financial investors
• Financial buyers interest in the
oil and gas sector is expected to
continue, with an increasing
number of funds focused on
energy
• Financial investors become
alternative partners for weaker
companies looking for funding
• Existing portfolio companies are
dealing with similar challenges
as other oil companies; cost
pressure will be intense
Proposed
actions to
consider
• Larger stronger service companies:
Get proactive about M&A; use
merger scenarios to discern com-
petitive impact; maintain strong cash
flow and balance sheets; evaluate
new business opportunities
• Smaller, weaker service companies:
Stress test balance sheet and
identify partners or investors
• Financial owners: Focus on scenario
planning, cash position, and cost
reduction to match demand
• Review current portfolio of
investments with scenario
planning
• Perform market scan of potential
targets; distressed companies in
need of funding could come
calling
• Secure skilled personnel and
guidance to help navigate the oil
and gas market
• Identify core areas of focus
Source: A.T. Kearney analysis

of significant shale assets in the Permian and Eagle Ford basins.2
Southwestern has also been
very active, purchasing $5.5 billion of Southern Marcellus Shale and Eastern Utica Shale assets
from Chesapeake. These follow on the heels of the $6 billion acquisition of GeoSouthern Energy
Corp by Devon Energy in 2013 and suggest that independents could continue to pursue scale
in the basins where they operate.
Some shale companies may rapidly dial down drilling activity, as they can in a matter of weeks,
and then are likely to crank drilling and production right back up again just as fast when prices
improve.
However, not all is rosy in the independent sector. Some firms are sitting on what were marginally
profitable fields at $90 to $100 per barrel, having heavily invested and expanded during the boom
years. These companies may now start to look vulnerable and be seen as acquisition targets
(see figure 5).
In a sustained low oil price scenario, these companies will likely look to offload some of their
high-cost assets—if they can—to rebalance their portfolios. Such assets may prove attractive
for firms with differentiated capabilities or a technology edge enabling lower production costs.
Two factors will drive independent M&A activity. First, we will see a continued drive for growth
and scale, in particular for basins to create scale—driving down costs and jockeying for position
1
Encana’s $6 billion to $7 billion purchase of Athlon was still to be completed when this paper was written. The Eagle Ford acquisition
was a $3.1 billion asset purchase from an E&P company.
Less vulnerable to
sustained low oil prices
Totalreserves
(mmboe)
Percentage reserves with breakeven oil price > $80/bbl
(at 2014 costs)
1
Contact authors for more details about independent companies
2
Reserves as defined by Rystad at P90—the low estimate of the remaining recoverable volumes
Sources: Rystad Energy; A.T. Kearney analysis
Figure 5
Independents’ reserve profiles1,2
More vulnerable to
sustained low oil prices
Larger integrated independentsSmaller independentsUnconventional focused companies
(unconventional assets >80% of production)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
0 5 10 15 20 25 30 35 40
Comp. N
Comp. M
Comp. L
Comp. K
Comp. J
Comp. I
Comp. H
Comp. C
Comp. B
Comp. A
Comp. G
Comp. F
Comp. E
Comp. D

to generate better returns. Second, independents with a significant percentage of high
breakeven assets, lower capital, and dividend cover and higher levels of debt—especially where
debt covenants include oil price hedges that are maturing over the next few months—could end
up in distressed situations (see figure 6).
The diversity of portfolio and financial strengths in the independent segment means the M&A
strategies will be diverse. The winners will be those with the cash flow and balance sheet strength
to take early action on portfolio high grading—either selling production to de-risk the low oil price
or taking advantage of the situation to capture bargains as weaker competitors struggle.
International oil companies: stronger focus on costs and portfolio high grading
IOCs have been making fewer acquisitions since 2010 (see figure 7 on page 14). At the same
time, IOC divestments have increased, especially in marginal fields and downstream assets
such as refining, retail stations, and chemicals.
IOCs have been reviewing their portfolios to determine where to focus to maximize their chosen
set of success metrics and to maximize shareholder value.
While reserve replacement ratios, economies of scale, and entry into unconventionals were
stated as the drivers of acquisitions in the past, industry leaders indicate future moves will be
to refocus their portfolios. This is also observed in many IOCs’ emphasis on free cash flow and
dividend payment in their strategy and financial reports to the market.
Sources: Rystad Energy, Bloomberg; A.T. Kearney analysis
Figure 6
Independents’ capital and dividend cover ratio vs. debt/equity (%)
20% to 30% resources with breakeven oil price > $80/bbl
>30% resources with breakeven oil price > $80/bbl
Size of bubble represents relative 2013 revenues
10% to 20% resources with breakeven oil price > $80/bbl
<10% resources with breakeven oil price > $80/bbl
Capitalanddividendcover
Total debt/equity (%)
0.5
1.0
1.5
0 10 20 30 40 50 60 70 80
Comp. O
Comp. N
Comp. M
Comp. L Comp. J
Comp. I
Comp. H
Comp. C
Comp. F
Comp. E
Comp. D
Comp. B
Comp. A
Comp. J
CCo
Comp. K
Comp. M
Comp. G

In recent years, IOCs have used prices down to $80 per barrel in scenarios to sanction projects.
With strong balance sheets, downstream as a counterbalance, and scale, IOCs are likely to
weather the oil price plunge by cutting near-term capex, reducing costs, and focusing on a
smaller set of upstream projects. They may sell or mothball some assets to free up cash.
Falling oil prices will cut activity and shift the focus to lowering breakeven prices (see figure 8).
As capital spending declines, service companies will lower pricing to maintain utilization.
1
Excludes non-O&G related deals purchased by O&G companies
Figure 7
Leading IOC acquisitions since 2010 ($ billion)1
Exxon Mobil Corporation
BP plc
Royal Dutch Shell plc
Chevron Corporation
Total S.A.
Eni S.p.A.
ConocoPhillips
75
50
25
0
2014
(YTD Oct)
2013201220112010
–45%
Region or fieldRegion or field Average breakeven price, June 2014
Sources: Rystad Energy; A.T. Kearney analysis
Figure 8
Breakeven prices by type of fields
Arctic region $78/bbl
Oil sands $74/bbl
North America shale $62/bbl
Ultra Deepwater $57/bbl
Onshore Russia $54/bbl
Deepwater $53/bbl
Offshore shelf $43/bbl
Offshore Middle East $29/bbl
Average breakeven
price is expected to
change as industry
responds to cost
pressure and low
utilization.

The economics for different basins will change. Operators have already got breakeven prices
down to $30 per barrel for some parts of south Texas, while Bakken may need closer to $50.
Our experience with many IOCs confirms their increasing focus on improving cash and
reducing costs, typically via standardization and efficiency exercises—even before the oil
price decline. With the vast majority of costs sitting in the IOC suppliers, it is now crucial that
IOCs develop leading capabilities in procurement and supply chain to address the intense
cost challenge in a sustainable way. This will impact consolidation in the service sector and,
as best practices from other industries are adopted, will also drive the need for deeper, more
strategic relationships with oil-field service companies and engineering, procurement, and
construction firms.
New technologies have the potential to unlock existing and new reserves at attractive economics.
We explored with IOCs if they should acquire or in-source service companies for technology
or capabilities as part of building cost advantage or differentiated capabilities to take to joint
ventures. This drew an interesting and diverging debate. “Buying companies for exploration
skill doesn’t work as the talent just walks,” one CEO said. Another had a more positive position,
saying, “People consistently underestimate the value of technology.” For most executives, it
was not an area much considered, mainly because of integration risks. Many noted this could
be a new avenue to consider in establishing competitive advantage, especially in areas that
add to their technical capabilities in exploration and frontier fields.
Regardless of improving economics, the need to meet dividend and capex commitments will
accelerate divestment programs in IOCs. Some felt that, given depressed oil prices, this may
favor a more aggressive downstream divestment agenda, where asset values are less impacted
by low oil prices.
Any acquisitions are likely to be opportunistic if valuations decline in a sustained low oil price
scenario and could extend to buying service companies to supplement strategies and any
technology gaps.
Most IOCs already have an M&A strategy mapped out. The focus on cost reduction, divestments,
and meeting shareholders’ near-term expectations is making it more challenging for major
IOC acquisitions, but the stronger positioned will undoubtedly take advantage of the buyers’
market. Executives were skeptical about another round of IOC mega mergers in response to
low oil prices and cost pressure—but never say never.
National oil companies: pace of investment will slow and depend on host
government agendas
While IOCs have retreated as buyers from the M&A market since 2010, NOC activities increased
with some major deals in recent years (for example, Rosneft-TNK in 2013). The Chinese were
especially active in international deals before 2013, while Middle Eastern, Indian, and Russian
NOCs remained absent from international acquisitions (with the Russians focused mainly on the
former Soviet Union).
The dynamics for NOCs are understandably different than for other oil companies—acquisition
rationales range from energy security and internationalizing outside their home country to
geopolitics and acquiring capabilities or technology know-how—with some more constrained
by having to help their government balance their books.

Looking forward, expected M&A trends for NOCs vary by region and type:
China. Acquisition of resources is likely to be more careful and considered as NOCs learn from
previous acquisitions. If oil prices stay low, good opportunities to acquire more needed resources
are likely, especially in situations where they could be invited as potential investors or partners to
alleviate distressed situations or where geopolitics prove to be a barrier for other investors.
Russia. Deals are governed in large part by geopolitics. Russian NOCs very much need tech-
nology know-how to develop their Arctic and shale, but investments from Western companies
are now hampered by sanctions. Cross-border acquisitions outside Russia, especially down-
stream, were also seen as options for Russian NOCs to extend their sphere of influence.
India. These companies remain behind other NOCs in international acquisitions, but they could
start buying, especially in a sustained low oil price scenario. Some have publicly indicated their
intention to buy the resources they need, but real moves must overcome bureaucratic and
other internal hurdles.
Middle East. With their own strong resource base, these NOCs have not been active buyers of
upstream positions, preferring to buy and grow capabilities in other industrial sectors. (In 2014,
Saudi Aramco acquired a stake in S-Oil, a downstream firm in Korea.) Perhaps with their strong
cash positions and potentially good opportunities at low cost while oil prices remain low, more
may venture to take international positions, as Mubadala, Kufpec, and Kuwait Energy Company
have done.
Many NOCs have enough cash to take a significant role as buyers in the expected new wave of
M&A, especially if oil prices stay low. This would be a good time for them to reassess their strat-
egies to be ready for proactive moves that fit their remit and government objectives. The window
of opportunity will not last forever. Will NOCs move fast enough to take advantage of the situation?
Oil service companies: an intense focus on reducing costs will drive consolidation
Total reported M&A activity in the oil service sector slowed between 2012 and 2013. Then in 2014,
deal value increased dramatically, especially with the $35 billion Halliburton and Baker Hughes
merger announcement. The sector is extremely diverse with multiple sub-segments, from
About the Study
To understand how the market
could evolve and its drivers, we
talked with more than 30 senior
executives across the globe,
spanning the entire value chain
from the oil majors, national oil
companies, and leading indepen-
dents to service companies and
financial investors.
Our analysis includes all M&A
in the oil and gas industry from
2003 to November 2014, with
utilities classified by SIC codes.
The following transactions are
not included in our analysis:
• Deals where both partners or
their parent companies are not
in the oil and gas industry
• Deals that were classified by
Dealogic as a buyback
• Deals announced outside of the
analysis period
Most transactions are displayed
on an annual basis. Unless
otherwise stated, transactions
are captured by date of
announcement rather than date
of completion as this is closer
to when they were negotiated.
Dealogic is the main source
of all M&A data; Thompson
is the secondary source.
Rystad Energy is the source
for all reserves and production-
related data and also helped
classify independents. SIC-
code categories are based
on the U.S. Department of
Labor’s Occupational Safety
and Health Administration.

seismic, drilling, development, oil-field services, and IT to suppliers of consumables, logistics
and transport, and engineering, procurement, and construction. Each has its own set of charac-
teristics and drivers.
“…the oil and gas service sector is at
the start of a major restructuring…full
of opportunity and risks!”
—Oil field service provider
The oil-field services sector has often been described as an hourglass with the top three firms
dominating with around 40 percent market share and a multitude of small firms making up the
rest. Financial investors such as private equity firms have been active acquirers. Over time,
financial investors have taken a bigger role. In 2014, reported deal values for financial investors
were the highest in more than three years (see figure 9).
As operators look to manage cash flow with lower oil prices, many prospects, projects, and
fields could quickly become uneconomic and be delayed or stopped entirely. Pressure to lower
rates is being passed directly on to service companies, which face lower utilization of rigs,
vessels, and crews. Operators expect their suppliers to share the pain, and competition for
business will intensify, especially in regions where breakeven margins are thin. This will hit
drillers and offshore seismic companies (with high fixed costs) first. Others with longer-term
contracts will have a little more time to adjust, but not much—perhaps only a few months.
OFS
257
24%
246
20132012
43%
Financial
Others
33%
45%
31%
25% 25%
2011
293
30%
Oil service company OFS M&A transactions by acquirer
(deal volume)
Figure 9
Oil field services (OFS) deal volume and value
2014
YTD Nov
2012 2013
293
257
246
34 32
72 Deal volume
Deal value
($bn)
44%

A.T. Kearney’s recent engagement as a partner with the World Economic Forum looked closely at
unlocking the full potential of oil-field services. This work shows that the sector is ready to take
action to address the key challenges to deliver lower costs and better returns on capital invest-
ments. However well the sector responds, we expect significant M&A activity in at least two ways:
Smaller oil service companies as targets. Valuations will decline. Companies that are more
vulnerable (such as those with cash flow or funding difficulties) will be considered potentially
attractive targets depending on what they offer. Buyers are likely to be large, well-positioned
oil service companies and non-traditional industry participants such as engineering services
firms looking to expand their portfolios. Financial investors are expected to be active, although
some industry observers point out that some companies with potential liquidity issues are
already owned by private equity.
Largeroilservicecompaniesasbuyerswithmergerpotential. Stronger and larger companies
will look to capitalize on more favorable implied valuations to further strengthen market share
or become fuller service providers and thus be better able to address the cost squeeze with scale
synergies. With increased cost pressure, sub-scale companies will look to secure synergies and
improve negotiation positions with operators. The competitive landscape may change quite fast.
Even companies that have no M&A intentions will need to understand how the dynamics
impacting their business will change as their competitors and customers realign.
The oil-field services sector is poised for a major wave of M&A activity as large companies make
strategic and scale synergy moves. Who will the winners be? At the other end of the hourglass,
financial investors with plenty of capital can pick up companies at the right price. Will they have
the confidence to invest in the face of lower, more volatile oil prices and a sharp downturn in
service sector demand?
Financial investors: growing involvement in key sectors
These companies account for 21 percent of the transaction value in 2014 (similar to 2013’s 23
percent). Most transactions are in the upstream sector. Examples of investment firms active in
2014 M&A include Apollo Global Management (acquired Encana’s Bighorn assets in the Alberta
Deep Basin for $1.8 billion), Al Mirqab Capital SPC (acquired Heritage Oil for $1.8 billion), and
Morgan Stanley (acquired 11.86 percent of Argentine energy group YPF from Repsol for $1.4
billion). The 2014 third-quarter activities are largely driven by private equity buyers, including
Blackstone, Templar Energy, Mountaineer Keystone, and Vin Oil and Gas.
“…returns from oil and gas investments,
albeit risky with price volatility, are too
good for a lot of funds to ignore.”
—Financial investor
Despite the price volatility, which does not lend itself well to traditional financial investor
models, and the profitability pressure, financial buyers’ interest in the oil and gas industry is
expected to continue. With more focusing on energy and their abundant fund availability, more
deals are likely to come from financial investors.

Over the past few years, financial investors have focused on the oil services sector. However,
there are signs that they are expanding their interest to operators with bigger or more complex
assets and larger capital needs.
Feedback from many in the oil industry highlights that some financial investors are new to
the market and have a poor understanding of oil and gas and its risks. This can significantly
drive up valuations on assets. To succeed, financial investors need to appreciate the risks and
cyclical nature of the upstream sector and the need to take a long-term investment view to
realize full value.
“Plenty of capital looking for opportunity
with the right operator.”
—Financial investor
Downstream M&A could be an area of opportunity for financial investors. Integrated companies
are reviewing their portfolios and offloading some downstream assets to build up cash for
upstream investment. Cash flow and margins downstream can balance those upstream and
are somewhat more stable (as oil prices are eventually passed through), which better matches
traditional financial investor models.
The recent declines in oil price will create a dynamic shakeout in the sector. Financial investors
that have plenty of capital and are still looking for a home in the sector have a unique opportunity
to participate given the stressed cash flow of some firms. The question is, who has the risk
appetite to take on the best opportunities in what will be a turbulent time for those in oil and gas.
The New Competitive Landscape
Strategic deals over the next six to 12 months will help define the winners in a new competitive
landscape. Cost and cash-flow pressures will be intense for all. IOCs and independents will cut
near-term capex, particularly for high-cost and less economically robust projects or those with
returns that are further out. With fewer projects at a more measured pace, these firms will be
able to design and plan projects more effectively, which will lower costs. Exploration in frontier,
deepwater, and other high-cost areas will be drastically cut back. With a different set of drivers,
NOCs are likely to pace their investments to meet economic and political agendas set by their
governments. Service companies will experience a sharp drop in demand—some areas, such
as deepwater drilling, sooner than others—and will need to get their fixed costs down fast.
Against this backdrop, our analysis and discussions with industry executives reveal several
important insights to consider when looking at the opportunities and threats from likely M&A
across the oil and gas industry:
• A new wave of M&A will arise across the value chain in the next six to 12 months, with a window
of opportunity that may be shorter than expected.
• Coupled with the oil price slump, recent trends in the industry will exacerbate the differences
between those that thrive and those that simply weather the storm.

Authors
Richard Forrest, partner, London
richard.forrest@atkearney.com
Thomas Luedi, partner, Hong Kong
thomas.luedi@atkearney.com
Vance Scott, partner, Chicago
vance.scott@atkearney.com
Alvin See, principal, London
alvin.see@atkearney.com
A.T. Kearney contributors to the study:
Americas: Vivek Chidambaram (Houston), Dario Gaspar (São Paulo), Sean Heinroth (Houston), Neal Walters
(Canada), and Herve Wilczynski (Houston)
Europe, Middle East, and Africa: Jose Alberich (Middle East), Joerg Doerler (Russia), Lars Eismark (Nordics),
Alberto Fumo (London), Tobias Lewe (Germany), Jim Pearce (London), Victor Perez (Madrid), Willem Plaizier
(South Africa)
Asia: Vikas Kaushal (India), Chris Livitsanis (Australia), and Anshuman Maheshwary (India)
• Asian and some other NOCs are more likely to play a major role as buyers, while IOCs will
continue to divest and selectively pursue acquisitions.
• Independents under pressure will offer solid opportunities for those strong enough to take
advantage of the situation. More adventurous financial investors may also become buyers.
• The oil-field service sector has all the ingredients for consolidation and major M&A activity
from financial investors. The wildcards are the non-traditional service companies, such as
oil and gas equipment engineering firms, that could make strategic moves toward building
service capabilities in time for an upturn.
The new oil and gas industry dynamic will present some rare opportunities for those willing
and able to adopt contrarian strategies against low and volatile oil prices, a drop in demand
for oil services, and the need to focus on reducing costs. If supply holds up and demand
growth remains slow, oil prices may continue to fall and do so for a longer time period. But in
due course, prices will rise again. The window of opportunity may be shorter than some think.
Strategic M&A deals in 2015—whether acquiring, partnering, or divesting—will help define the
winners and losers in the new industry landscape.

A.T. Kearney is a leading global management consulting firm with offices in more
than 40 countries. Since 1926, we have been trusted advisors to the world's foremost
organizations. A.T. Kearney is a partner-owned firm, committed to helping clients
achieve immediate impact and growing advantage on their most mission-critical
issues. For more information, visit www.atkearney.com.
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