Investors in oil and gas could be forgiven for not knowing what to do next, given ongoing uncertainty around the plunging oil price. Conventional wisdom says shares in the oil majors are valued for their reliable income streams. 

But even though the Royal Dutch Shell plc (NYSE:RDS.A) – BG Group plc (OTCMKTS:BRGYY) merger (one with very particular individual company strengths) has been given the go-ahead by both lots of shareholders this week, there are already questions being asked about future dividends. While for those investors looking at the U.S. oil and gas market who think industry consolidation is next, there is a report just out worth reading. 

Starting with the Shell/BG merger, investors must be noting that Shell has not cut its dividend for many decades. But, as the Financial Times (FT) reported last week: “exchange-traded dividend futures are pricing in about a 17 percent cut to Shell’s payout this year, and steeper reductions, of more than 40 percent, for 2017 and 2018."

The FT quoted analysts saying “Shell is well positioned to weather the storm.” However, there are a lot of ‘unknowns’. 

“Irene Himona at Société Générale says that, assuming Brent stays at $30 for the first half of 2016 and averages $40 for the year, the combined group’s organic free cash flow – what is left after capital spending – will be negative in 2016, but increase to about $4bn in 2017, assuming crude rises to $60 by then, higher than the $40 to $45 range currently suggested by futures markets” said the FT report.

Meanwhile, Chevron (NYSE: CVX), the second largest U.S. oil group, has just reported its first quarterly loss since 2002 – a $588m net loss in the fourth quarter of 2015 – and has promised further steep cuts in capital spending and operating costs. 

John Watson, Chevron CEO, said the company’s number one financial priority was “to maintain and grow the dividend,” suggesting that Chevron might keep adding to its borrowings to finance the distribution to shareholders. 

Against such a backdrop, what are the alternatives for investors and do they include focusing on industry consolidation? Mergers and acquisitions (M&A) in the U.S. oil and gas industry reached the lowest levels of fourth quarter deal activity in five years in terms of both deal value and volume, according to PwC US, in a report just out.

“The sharp contraction of oil prices and limited access to the capital markets led corporates to make strategic decisions preserving cash, resulting in a challenging M&A environment,” says PwC. 

Its report says that during the final three months of 2015, there were 42 oil and gas deals (with values greater than $50 million) accounting for $31.6 billion, compared with 70 deals worth $103.4 billion in the fourth quarter of 2014, a 69 percent decline in total deal value. In 2015, there were 179 deals worth $196.1 billion, a decrease from the 278 deals worth $304.4 billion in 2014. 

“Accelerating declines in oil and gas prices coupled with the closing of the capital markets for oil and gas companies during the second half of 2015 drove management teams to focus on cash preservation. As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models. This internal focus resulted in a steady decline in oil and gas deal activity leading to the lowest fourth quarter in five years, a period that is typically strong for oil and gas deals,” said Doug Meier, PwC’s US Oil & Gas Sector Deals Leader. 

“While the headlines appear depressing, deal-making opportunities exist for companies with dry powder and who are willing to use their equity as currency for doing deals. Looking at the subsectors, midstream companies, including MLPs, were hit with a devastating left-right combination of dramatically lower stock (unit) prices and closed capital markets, resulting in a precipitous decline in the fourth quarter midstream deal activity,” added Mr. Meier.

But financial investors continued to show interest in the oil and gas industry, PwC points out — with 14 transactions worth $4.3 billion, or 33 percent of the total announced deals in the quarter. Equity commitments from private investors accounted for six of these 14 financial deals worth $2.2 billion in the fourth quarter of 2015. 

“Throughout 2015, financial investors continued to back management teams and raise capital for both equity and credit investments in the oil and gas space,” said Rob McCeney, PwC US Energy & Infrastructure Deals Partner. 

“Financial sponsors are well-positioned to find distressed opportunities and will use positions of weakness to their advantage,” he added.


Dina Medland is an independent writer, editor and commentator with a strong focus on issues around corporate governance, ethics, the workings of the boardroom and sustainable business. She is on the team of contributors to @ForbesEurope and is an ex-Financial Times staff member who has been a regular contributor in recent years. Further details about her background and a portfolio of work – including her commercially sponsored blog ‘Board Talk’ are available on her website