The General Market Trends Essay

Question:

Write n essay on the general market trends and the transactional values.

Answer:

In the period between 2014 and 2016, oil prices dropped drastically that resulted in changes in almost all the large companies involved in the oil industry. More or less all large multinational companies underwent some amounts of losses in order to maintain the market trend (Zhang 2012). Due to these reasons, some companies joined hands to reduce the overall losses by reducing the expenses involved in the oil industry. Some companies joined together by merger deals and other companies bought small and medium sized companies through acquisition deals. These mergers and acquisitions enabled the companies to reduce expenses and increase profits in the industry (Ahern 2012). For example, merger between an oil extraction company and an oil products manufacturer company enabled both to reduce expenses by operating extraction and manufacture activities within the same company.

In this report, the general market trends and the transactional values have been taken and analyzed in order to understand the general trends of Shell and BG group merger. The selected merger is Shell and BG group and their deals and acquisitions during the oil price drop between 2014 and 2016.

Literature Review

According to the works of Ng and Donker (2013),

“The 2015 mergers and acquisitions report was written in the context of an 18-month-long oil price collapse that had led to increased uncertainty for upstream oil and gas producers, as well as the oilfield services and midstream sectors. In contrast, the downstream sector has benefited from widening refining margins, as feedstock prices fell rapidly while refined product prices declined at a slower pace.

Due to crude oil supply growth outpacing demand growth globally, many oilfield services companies cut manpower, mothballed equipment, and began the process of rationalizing their geographical positions and service line portfolios.

By the first half of 2015, many upstream producers followed suit with cash conservation measures and accelerated cost reductions involving a combination of manpower layoffs, renegotiation or cancellation of service and supply contracts, and deferral of discretionary capital projects. Excess oil production, particularly in the United States, was the most dominant factor affecting oil prices in 2015.”

Bairi et al. (2013) said that there are three factors that result in mergers and acquisitions of the companies. These are:

  1. The potential for recovery in oil prices
  2. The availability of capital
  3. Policy, tax, and regulatory changes

In a report, Cartwright and Cooper (2012) opined that “Mergers and Acquisitions activity in the upstream market for the entirety of 2015 was lower in terms of deal count and value than in any year since 2012. Distressed companies were, for the most part, able to avoid selling assets or being acquired by other companies. The heightened uncertainty and depressed confidence among market participants led to conditions that inhibited transaction flow.”

In his work, Austvik (2012) also said that “The midstream sector, which includes oil and gas pipelines, processing plants, liquefied natural gas (LNG) facilities, and bulk storage terminals, delivered a deal count roughly equal, if not slightly above 2014. This buoyancy in transaction activity was in contrast to the significant decreases seen in the upstream and oilfield services sectors and reflected the different drivers present for the midstream sector.”

Tan (2013) also added that “The downstream sector is a varied market segment that not only includes refining of crude oil but also oil product terminals, marketing, distribution, and retail operations. In 2015, downstream transaction volume was fairly consistent with 2014, if not slightly lower in dollar value. The geographical spread of downstream transactions across the globe was notably more diversified than it was in the other sectors, with deals taking place in every major region.”

Ghosal and Sokol (2013) on the other hand provided a different view. He said that many of these merger and acquisition deals were not dependant on the fall of price of oil. Nagano and Yuan (2013) added to this view and explained that most of the merger deals are to show the business prowess of the particular company or even expansion of business over international boundaries.

Research Methodology

In any study, the research methodology and the use of the research philosophy is steady with deciding the proper path for giving fundamental specifying to the study. The research philosophy is useful for doling out the analysts with leading presumptions and key comprehension of the point. The exploration theory is to be adjusted to the reasoning procedure of any study. The methods of insight are recognized to be positivism/post-positivism, social constructionist, participatory, and pragmatic. Further philosophical methodologies and their portrayal are delineated to demonstrate the correct legitimization under the study with a specific end goal to incorporate detailed study.

Positivism/post-positivism: For some reasons, there are significant amount of contradiction and inconsistency prevails. The paradigm is identified to be positivism and post-positivism along with quantitative research. After some debate implications, the researchers have argued that the positivism and post-positivism is an act of ‘real science’, whereas, some has implied that the philosophy is not suitable for depicting the human and social issues in a complex manner. However, the post-positivism is approach that is more suitable rather than positivism in this study.

Social constructivism: In this philosophy, the people are inclined for making sense to the living world, and proper interaction can lead to subjective understanding by means of their experiences. Social constructivists trust on variations in reality based on the multiplicity and differences.

Pragmatic: The pragmatic philosophy is more or less adding all the philosophical approaches within one particular study. This pragmatic approach is comprised of all approaches’ strengths and weaknesses without specifying the suitability of any approach.

Participatory: This philosophy is associated with marginalized or vulnerable people groups into the study. The philosophy is dependent on limited groups of people in any study.

The study depends on primary and secondary information gathering alongside reasonable survey investigation. Then again, the optional studies are bolstered with related works before this specific study. Along these lines, the participatory theory is rejected as the study is not just reliant on individuals' support. Then again, the social constructivism is not appropriate, as this study does not offer a few varieties as a general rule. Once more, the study is led with supreme specifying and thus, the post-positivism logic is appropriate as opposed to down to earth theory. In any case, a portion of the scientists still contended that post-positivism reasoning looks for 'outright truth'; and in genuine examination that is not in any case conceivable. Consequently, the examination proof cannot be dependable to the study and the researchers’ endeavors for circumstances and results approach. The research methodology is huge for reasonable configuration upkeep inside the study with uncovering the present possibilities. The capability of the study lies in the fitting methodology determination and a large portion of the studies take after either inductive or deductive methodology. In the middle of two methodologies, the regular one is distinguished to be the inductive methodology, while the methodology does not bolster a bigger number of information as opposed to the deductive methodology. The deductive methodology is more point by point with profound comprehension of subject as indicated by the gathered information.

Findings and Discussion

Cause of Merging in Shell and BG group

From a study of the trend in oil and gas market, it has been seen that with the fall of oil price, the oil and gas transactions have fallen drastically whereas the merger and acquisition deals rose by a large extent gradually from 2011 to 2016. This signifies that most companies were mainly interested in expanding their business over international boundaries rather that reaping most out of their business within a single region. Moreover, the drastic fall of oil price further forced Shell and BG group to extend their business in order to maintain viability in the market.

Importance of Shell and BG group Merger

In a finding by a major journal, “Some 2014 trends continued into 2015. The decline in national oil company (NOC) M&A activity continued in 2015, and total NOC deal value dropped to US$6.1 billion from about US$21 billion in 2014, down significantly from the 2012 record of almost US$122 billion. In the 2014 report, the market expected Chinese and Asian NOCs to take advantage of attractively priced assets, but the combination of lower oil prices and oil price volatility challenged such activity with many NOCs focusing more on their portfolios than on growth. Oil price outlook uncertainty and concerns over whether acquisition prices would fall further also limited private equity M&A activity in oil and gas in 2015. There is, however, a significant pool of industry and financial investor capital targeting the sector which could be very busy in 2016.”

External Factors for PESTLE Analysis

Bairi et al. (2013) said that there are six external factors that result in mergers and acquisitions of the companies. These are:

Political factors: In a report, Cartwright and Cooper (2012) opined that “Mergers and Acquisitions activity in the upstream market for the entirety of 2015 was lower in terms of deal count and value than in any year since 2012.

Economic factors: In his work, Austvik (2012) also said that “The midstream sector, which includes oil and gas pipelines, processing plants, liquefied natural gas (LNG) facilities, and bulk storage terminals, delivered a deal count roughly equal, if not slightly above 2014. This buoyancy in transaction activity was in contrast to the significant decreases seen in the upstream and oilfield services sectors and reflected the different drivers present for the midstream sector.”

Social factors: Tan (2013) also added that “The downstream sector is a varied market segment that not only includes refining of crude oil but also oil product terminals, marketing, distribution, and retail operations.

Technological factors: Ghosal and Sokol (2013) on the other hand provided a different view. He said that many of these merger and acquisition deals were not dependant on the fall of price of oil. Nagano and Yuan (2013) added to this view and explained that most of the merger deals are to show the business prowess of the particular company or even expansion of business over international boundaries.

Environmental factors: In 2015, downstream transaction volume was fairly consistent with 2014, if not slightly lower in dollar value. The geographical spread of downstream transactions across the globe was notably more diversified than it was in the other sectors, with deals taking place in every major region.

Legal factors: The legal factors are identified as regulatory factors, scheme description, and financial benefits analysis. Distressed companies were, for the most part, able to avoid selling assets or being acquired by other companies. The heightened uncertainty and depressed confidence among market participants led to conditions that inhibited transaction flow.

Conclusion

From the report, it can be concluded that there are many possible reasons for the merger and acquisition deals in the oil industry during the fall of oil price between 2014 and 2016. More or less all large multinational companies underwent some amounts of losses in order to maintain the market trend. Due to this reasons, some companies joined hands to reduce the overall losses by reducing the expenses involved in the oil industry. Some companies joined together by merger deals and other companies bought small and medium sized companies through acquisition deals. These mergers and acquisitions enabled the companies to reduce expenses and increase profits in the industry. Due to crude oil supply growth outpacing demand growth globally, many oilfield services companies cut manpower, mothballed equipment, and began the process of rationalizing their geographical positions and service line portfolios. By the first half of 2015, many upstream producers followed suit with cash conservation measures and accelerated cost reductions involving a combination of manpower layoffs, renegotiation or cancellation of service and supply contracts, and deferral of discretionary capital projects. Excess oil production, particularly in the United States, was the most dominant factor affecting oil prices in 2015. The decline in national oil company (NOC) M&A activity continued in 2015, and total NOC deal value dropped to US$6.1 billion from about US$21 billion in 2014, down significantly from the 2012 record of almost US$122 billion. In the 2014 report, the market expected Chinese and Asian NOCs to take advantage of attractively priced assets, but the combination of lower oil prices and oil price volatility challenged such activity with many NOCs focusing more on their portfolios than on growth. Analyzing all the available data and the general market trends during the specified timeline, the main reasons and other values have been deduced and some recommendations have been provided accordingly.

Recommendations

Recommendations that can be provided that can be provided to the oil companies regarding mergers and acquisitions during fall of oil price are as follows:

The companies should always be able to predict the possible rise or fall of oil prices in the market. This is essential since once the price falls drastically, the company has to take damage control techniques resulting in unwanted mergers and acquisitions.

The companies should be well aware of the other companies in the industry. This is necessary, since during mergers or acquisitions, the companies should be aware of the other with which they are building partnership.

The companies should create some new policies so that they are not forced to merge with other companies at an unwanted timing. Moreover, merger and acquisition are not the only solutions during the fall of oil price.

The companies should have some alternative plans for business and supply. There are some incidents like war, oil spill, mine explosion and others, that result in decrease in the supply as well as hike in the oil price.

Reflection

In this paper, I have conducted a research on the identification of the primary reasons that a have lead to the sudden and unexpected drop in the price of the fossil fuels and its effects on the oil industry. I have conducted an extensive research on the trade policies and the existing transactional policies on the trade of fossil fuels for understanding the factors that have been related to the change in price of fossil fuels. I have also analyzed the possible factors that can lead to the fall of the price of fossil fuels and the possible factors that have led to the merger of different companies in the oil industry. I limited my research to the period between 2014 and 2016. I used existing statistics and conducted a general survey myself to determine the demands of fossil fuels all over the world. I also analyzed some statistics over the general trend of fossil fuel usage in different sectors of the countries and the operations in the companies in the oil industry. I assorted all the related information and used them for coming to a specific conclusion regarding the fall of price of the fossil fuels and the merger of different companies. Through this research, I have been able to enhance my analytic skills in collecting data from different reliable sources as well as assorting all the relevant data for concluding the required factor. In the course of the research, I have set a number of aims that had to be met at the end of the research. I have been successful in meeting all the aims that I had pre set. For gathering sufficient information and understanding the general trade of the fossil fuel business, I conducted a literature review. In this part, I collected a large number of relevant articles and works of reputed researches that enabled me to gain a good amount of technical and statistical knowledge on the subject. I also assorted the most relevant parts of the works and made them a basis for conducting my part of the research. The literature review process also helped increase my analytic skills in extracting the most important pieces of information from a large amount of data. The research methodology procedure helped me use all the assorted information and comparing them with the latest statistics for finding a general conclusion for the aims of my research. My research methodology also helped me gain research skills that will help me in the future. I conducted the data analysis part using my analytic skills. For this, I assorted all the data from reliable sources and compared them with the modern world statistics to find the reasons behind the fall of prices of fossil fuels. For the critical evaluation part, I completed my research and analyzed it all over for identifying different possible views on the subject. This also helped me rectify any possible mistakes that might have surfaced during the research process. Moreover, I have been able to enhance the quality of my research using the critical evaluation process. This process also helped me reach the necessary final conclusion. Finally, I was able to meet all the requirements of the research as well as enhanced my technical and analytic skills and successfully completed all the aims of the project.

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