The latest fight between OPEC and American shale fracking presents a mixed bag. Lower oil prices certainly bodes well for consumers, at least in the short run, but the overall slump in the oil industry is likely to produce collateral damage that may actually hurt the global economy. Oil extraction and production represent such a large portion of the world economy that a 50% dip is likely to hurt more than help. Industry consolidation will only be natural.
Unfortunately, most American shale producers will not remain profitable below $50 a barrel. The rare instances where firms expect to remain profitable, the chances that they’ll desire to stay in the oil production business will be slim. As consolidation occurs, inefficient companies will be extracted from the industry. The availability of easy capital in the industry has also helped to spur a large glut of producers in the market. Private equity has also helped to spur this large expansion. Luckily it is also strengthening the balance sheets of some firms, making them well-positioned to provide acquisition financing for industry roll-ups.
Those that have managed their balance sheets conservatively may find ample inorganic growth opportunities as the industry consolidates. Furthermore, using reverse mergers, public shells and direct public offerings will be extremely helpful in facilitating the consolidation.
There has been a great deal of talk about oil prices. The continuation of the current oil prices will spur more M&A and the growth in the oil M&A market will spur more reverse merger activity. There are fortunately many different ways to take consideration in the sale of a business. Cash is only one. Public company stock can be an effective combined strategy in assisting a company in performing a successful roll-up.
Falling oil prices have increased the level of risk to the overall market and the oil market in particular. With the increase in risk and the expanded opportunities for consolidation through M&A, massive opportunities await those with strong cash positions, decent balance sheets and the right plan for performing an effective roll-up. As always we’ll be there to assist.