Oil M&A is booming

Why are Oil companies buying up smaller rivals?

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Today's newsletter is a 7 min read:

• 🛢️ Oil M&A is booming: Why are Oil companies buying up smaller rivals.
• ➕ Plus: Amazon goes for retail, Ford cuts jobs, US inflation holds up and Trump's got competition.

📰 News Briefing

1. 🛍️ Amazon's CEO, Andy Jassy, recently announced that the online retailer is preparing to expand into physical stores and strengthen its struggling grocery business. Five years after buying Whole Foods for $13.7bn, Amazon is still trying to make a bigger impact on the $1.6tn US grocery sector.
2. 🚗 Ford is cutting 3,800 jobs in Europe, which represents 11% of its workforce in the region, to become more competitive in the electric-vehicle market. The company is expected to invest $50bn in EV manufacturing by 2026 and to produce only electric cars at its European plants by 2035.
3. 📈 In January, consumer prices in the US rose by 0.5% compared to December, which ended a trend of decreasing prices. This suggests that the US economy is doing better than anticipated, but it also indicates that there is more persistent inflationary pressure. As a result, the Federal Reserve may have to increase interest rates to control inflation.
4. 🇺🇸 Nikki Haley, former governor of South Carolina and former ambassador to the UN, announced that she will run for president in 2024, becoming the only Republican to challenge Donald Trump so far.

🤿 Deep Dive

Oil M&A is booming

In brief:

• M&A is booming in the oil industry as large companies buy up oil fields to diversify their portfolios and boost revenues. Below we discuss what that means for law firms and their clients.

Time to invest

If you read our newsletter last Friday, you'll know that oil and gas companies are doing particularly well at the moment. These companies have been able to drive home record profits due to the high energy prices fuelled by Russia’s invasion of Ukraine.

US oil producers, in particular, have generated more than $150bn in free cash flow in 2022 and are expected to bring in another $120bn in 2023 (not bad). Additionally, these companies have been able to pay down tens of billions of dollars in debt over the past year meaning they now have lots of cash firepower for deal making.

Why the deal boom?

Many oil companies fear they are running out of prime land for oil drilling as the past decade of busy drilling has reduced the yield of many of their key wells. As production at their current oil fields dries up, these companies will inevitably starting looking to snap up rivals with the best remaining drilling sites to boost their production and portfolios.

What about the deals?

In 2022, there were only 160 deals in the sector, the lowest figure since 2005. However, we've started to see the a few large deals struck late last year, and another $5bn worth of deals done across the sector in January. This is good news for the growing M&A trend. The more deals are completed the more certainty is given to the market leading to a sort of snowball effect of deals as more oil producers rush to snap up oil fields to avoid being left behind.

How does this Impact Law Firms and their Clients?

Note: In this section, we consider how law firms' clients may be affected by the story we discussed. We then explain how law firms can help, and which particular legal departments could see an increase in work and why.

💼 What does this mean for law firm's clients?

Energy Companies: Energy companies, particularly those with market values of less than $10bn, may be vulnerable to the anticipated M&A boom. They may struggle to access debt and equity markets, and rising interest rates increase their borrowing costs. As a result, they may need to rely on legal services to navigate the M&A process, as they become acquisition targets.

Private Equity Firms: As appetite among sellers intensifies, private equity firms may need legal services to advise them on their exit strategy and negotiate deals. The anticipated M&A boom may present opportunities for private equity firms to sell their previous investments at high prices. They may also have the chance to invest in energy companies that become acquisition targets. Overall, they will be keen to get stuck in to this growing activity in the oil industry.

Banks: Banks that provide financing for energy companies or advice on financing to M&A deals in the industry will see an increase in demand for their services. They will also need legal services to provide financing for the deals. This M& trend may present opportunities for banks to provide financing for the deals and expand their client base.

Regulators: Regulators (including both governments and market regulators such as the UK's Competition and Markets Authority) will need to ensure fair competition and prevent market consolidation as larger companies in the industry buy up smaller rivals. Their key concern will be avoiding the prospect of an oil market divided up between a few key players that dominate the best drilling sites and essentially run a monopolistic market after having bought up all their smaller rivals.

⚖ Which legal departments would this impact?

Corporate/Mergers & Acquisitions (M&A)

Due Diligence: The M&A legal department will be responsible for conducting due diligence in the run-up to mergers and acquisitions in the oil industry. This will include an investigation into the financial, legal, and operational aspects of the company being acquired. They review contracts, financial statements, regulatory compliance, and environmental issues to identify any risks and liabilities that could affect the deal.

• Example: When Matador Resources purchased private equity-backed Permian driller Advance Energy for $1.6bn, the M&A legal department would have conducted due diligence on the environmental and regulatory aspects of the deal, such as land-use restrictions, water rights, and waste disposal, to ensure compliance with regulations and prevent future legal challenges.

Negotiation and Structuring of Deals: The M&A legal department is responsible for negotiating and structuring deals, including financing arrangements, such as asset-based lending, reserve-based lending, and project finance. They also draft and review the legal documentation, such as purchase agreements, asset transfer agreements, and shareholder agreements.

• Example: When Diamondback and Marathon Oil acquired land in the Permian and Eagle Ford basins, the M&A legal department would have negotiated and structured the deals, including financing arrangements, to ensure that the transaction was structured properly.

Energy

Contract Negotiation: The Energy legal department will be responsible for drafting and negotiating complex contracts between oil companies and other parties involved in the industry, such as suppliers, customers, and partners. These contracts cover a wide range of legal issues, including environmental regulations, risk management, insurance, and indemnification.

• Example: When an oil company enters into a joint venture agreement with a partner to develop a new oil field, the Energy department will liaise with the Commercial and Corporate colleagues to draft the agreement, review the terms and conditions, and ensure that the contract complies with all relevant legal requirements in respect of oil fields and drilling.

Compliance: The Energy department is also responsible for ensuring that oil companies comply with various regulations, such as environmental, health and safety, and anti-corruption laws. They also advise on compliance with local and international regulations in respect of acquiring and managing oil fields.

• Example: When an oil company is planning to expand operations in a new country, the legal department will advise on the legal and regulatory requirements that must be met to comply with local laws and regulations. They will also advise on how to implement a compliance program to prevent violations of these regulations.

Antitrust & Competition

When a private equity firm is acquiring an oil and gas producer: In this scenario, the Antitrust & Competition legal department must advise the private equity firm on potential antitrust issues arising from the acquisition. They must assess whether the deal would result in market dominance or a reduction of competition in the oil and gas sector. This ties into the points we made on Regulators' concerns in the clients' section above.

• Example: In the case of Matador Resources’ purchase of private equity-backed Permian driller Advance Energy for $1.6bn, the Antitrust & Competition legal department may have had to assess the competition implications of the deal and work to ensure that it complied with antitrust regulations.

When an oil company is acquiring a rival: The Antitrust & Competition legal department will need tp advise the oil company on the antitrust issues associated with the merger or acquisition. They must assess whether the transaction would result in market dominance or a reduction of competition in the relevant market.

• Example: In the case of Diamondback and Marathon Oil's acquisition of land in the Permian and Eagle Ford basins, the Antitrust & Competition legal department may have had to assess the competition implications of the deal and work to ensure that it complied with antitrust regulations. They may also have to assist with obtaining regulatory approvals for the transaction.

Banking and Finance

Structuring Financing Arrangements: The Banking and Finance legal department can advise private equity firms and oil companies on structuring financing arrangements that meet their unique needs. For instance, the department can advise on asset-based lending, which involves using the company's assets as collateral for loans. The legal department can also advise on reserve-based lending, which involves using the company's oil reserves as collateral.

• Example: If a private equity firm is acquiring a smaller publicly listed oil and gas producer, the legal department can advise on structuring financing arrangements that suit the deal's size and nature.

Ensuring Regulatory Compliance: The Banking and Finance legal department can advise private equity firms and oil companies on ensuring regulatory compliance during the deal process. For example, the legal department can advise on regulatory compliance related to environmental issues, such as the Clean Air Act and Clean Water Act. Additionally, the legal department can advise on regulatory compliance related to anti-money laundering regulations, such as the US Bank Secrecy Act.

• Example: If an oil company is acquiring another oil company, the legal department can advise on the regulatory compliance issues that may arise during the deal in the context of banking and finance.