Is It Time for National Oil Companies to Renter the M&A Game?

National oil companies (NOCs) have been sitting on the sidelines of the latest merger frenzy in the industry, but the time may be right for these state-owned giants to return to spending on expansion via acquisitions, Wood Mackenzie said in a new report.

The NOCs have seen their share of spending on mergers and acquisitions (M&As) collapse to the lowest level in 20 years, but a push for diversification among Middle Eastern state oil giants and energy security issues in China may prompt state-held players to look at international expansion again, according to WoodMac.   

NOCs spending on international M&A crashed from more than $30 billion per year in the period 2009 through 2013, to less than $5 billion annually since 2019, Wood Mackenzie’s analysis showed.

The share of NOCs of global spend on M&A has slumped to less than 5% today from almost 50% at its peak.

But portfolio diversification, energy security, and attractive valuations of targets could incentivize NOCs to resume spending on M&A more.

In the current market, “motivations for foreign expansion have moved towards those shared by IOCs in terms of portfolio competitiveness and sustainability,” said Neivan Boroujerdi, director, corporate research at Wood Mackenzie.

“With M&A valuations attractive and NOCs’ financial ratings at all-time highs, the drivers for NOCs to fill strategic gaps through international business development have never been stronger.”

Some NOCs, especially from Asia and the Middle East, could look to take advantage of these opportunities, according to Boroujerdi.

“Middle East NOCs are well-placed to out-last other producers, but they do have areas of relative weakness, with portfolios overwhelmingly concentrated towards either domestic oil or gas – significantly more so than other NOC peer groups,” said Boroujerdi.

Some of these have already started to seize diversification opportunities. Saudi Aramco and Abu Dhabi’s ADNOC are venturing in the international LNG market, while Qatar’s LNG exporter, QatarEnergy is looking to boost exploration.

While North America has been the focus of the most recent M&A frenzy in the industry, “the upstream M&A market is uncrowded” elsewhere, Greig Aitken, Wood Mackenzie’s head of upstream M&A, commented.

Last year saw only 200 transactions globally—the second-fewest number of deals in the last 20 years, Aitken said, adding “But there are still a number of material, high-quality opportunities available internationally.”

By Charles Kennedy for Oilprice.com

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