Almost every day, there’s news of a merger, acquisition or disposal in the oil and gas industry. To outsiders, many of the deals seem strange – a game of pass-the-parcel involving entire companies. But there are solid business reasons behind the multiplicity of deals in this most mature of industries.

1. oil and gas
Guiding you through
a MAD world
Mergers, acquisitions
and divestMents

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Mergers, acquisitions and divestMents

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almost every day, there’s news of a merger,
acquisition or disposal in the oil and gas industry.
to outsiders, many of the deals seem strange – a
game of pass-the-parcel involving entire companies.
But there are solid business reasons behind the
multiplicity of deals in this most mature of industries.
For many years, successful oil and gas firms have actively managed their assets to optimise the
overall performance of their portfolio. analysts, usually within the portfolio management or strategic
planning team, use a range of models and techniques to assess risk and review the value of specific
divisions, markets or products to the company’s overall strategy.
this constant assessment informs decisions about mergers, acquisitions, divestments (Mad) and
joint ventures – whether these involve a few million dollars or euros and a dozen or so employees or
cover hundreds of personnel across several countries and are worth billions of dollars or euros.
Portfolio managers work against a backdrop of predictions about the energy market, aiming to
position their companies to take advantage of developments in years to come. Portfolios are
constantly changed to maximise a position in the market or redirect resources into ventures that are
expected to be more profitable.
HigH costs – (Potentially) HigH ProFits
upstream activities – exploration and production – drive profits for oil and gas majors. But they are
becoming increasingly expensive as we run out of wells that are relatively easy to drill. costly deep reasons to divest
water drilling will be necessary – but rates of returns are high.
• Poor assets with
contrast that with downstream activities – refining and retail. ernst & young, working on data from
deutsche Bank, estimate that the return on average capital employed for downstream activities is
no or limited
around half of that for upstream1. in other words, downstream is much less profitable. growth
in refining, it is cheaper to use large refineries in low-cost locations and export value-added product • non-core
to higher profit locations. But many majors still own smaller refineries on restricted sites in high-cost, business
western locations and these will need updating to meet new green legislation. it is uneconomic
to shut them because the sites are heavily polluted and would need costly decontamination. the • non-core market
obvious answer is to sell them.
• Wish to release
in retail, margins are thin and competition fierce. as petrol stations morph into a cross between a
supermarket, a newsagent, a bank and a fuel supplier, the oil majors increasingly view them as non-
cash from assets
core assets unless volume sales make them profitable. small companies specialising in retail are able
to make better returns.
1
divesting in the downstream oil and gas industry: a current market view and a guide for sell-side activities
Mergers, acquisitions and divestMents

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downstreaM divestMents
reasons to acquire
downstream, therefore, there is a trend to divest businesses that are in low- or no-growth areas,
• grow market allowing oil majors to streamline their operations and invest upstream or in new energy initiatives
share that will bring greater profits and growth.
But one large company’s divestment can become a smaller one’s acquisition or merger, allowing a
• differentiate
nimble player to gain market share and economies of scale or to enter a completely new market.
brand/products
others buyers may have different reasons. For example, property developers might want access to
• drive out more sites, while the business model for some upstream operators may demand a guaranteed outlet
overheads to for their products.
increase profits
a cost-cutting gaMe For two Players
• Fill gap in supply
the key to a divestment deal is the ability of both sides to cut costs. the seller not only gets funds by
chain
selling capital assets but also reduces central support costs. the buyer needs to strip out costs or, in
some cases, merge the acquisition into an existing operation to create economies of scale. in other
words, the deal changes the business model and processes of both companies.
oil majors, for instance, run organisation-wide enterprise resource planning (erP) systems designed
to capture vast quantities of data. these are relatively expensive to install and run but they give
multinationals a full overview of their world. when a smaller company takes over a refinery or petrol
station business, it needs a much smaller erP system and can make substantial savings. we are
helping a company in scandinavia, which has recently taken over a series of petrol stations from a
large oil company, to save €2 million a year in this way – money that goes straight to the bottom line.
Buying your way to ProFitaBility
acquiring one downstream company can also make another profitable. in greece, a local refining
company lost half its market share when a petrol station group was sold and its supply contract
went to a different organisation. then a second petrol station group was put up for sale. the refiner
bought it, doubled its retail network – and brought its margins back into healthy profitability.
in some cases, the managers of a downstream company can see ways of increasing its value if the
company is sold off, generally by changing centralised business processes to ones suited to a local
market. the managers can then offer a buy-out, often backed by venture capitalists or a merchant
bank, knowing that they can raise profitability. Multinational owners regularly accept this type of deal
because it gets them out of a low-growth area and frees capital for investment upstream
in other cases, a regional player might be trying to gain a strategic foothold in a specific market or
want to boost capacity and gain economies of scale. For example, a us liquid petroleum gas (lPg)
supplier with a presence in western europe wanted to establish itself in eastern europe. at the same
time, an lPg major wanted to get out of what it saw as marginal markets in Poland and the czech
republic. it was a perfect fit.
Mergers, acquisitions and divestMents

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creating joint value FroM jvs
the focus among strategy and portfolio managers on boosting downstream profits takes in joint
ventures.
take aviation fuel – a marginally profitable business for most majors. a delivery joint venture can
strip out overheads, substantially improving finances and leave a major with a presence that can be
exploited if the market changes.
in contrast, lubricants are a high profit sector but the cost of sales is also high. By either establishing
a series of local market joint ventures or creating a distribution agreement with efficient local players,
a major can retain product formulations and blending, making best use of capital investments in
plant while cutting sales costs and retaining brand control.
Majors will even form joint ventures among themselves if they see the possibility of mutual
profitability. Fuel cards are one area where this happens – majors will usually accept each other’s fuel
cards and process each other’s transactions.
downstreaM exit oF a Market
an oil major wanted to exit its downstream operations in a european market to release $350
million for investment elsewhere – but it also wanted to maintain its brand presence.
the divestment included hundreds of petrol stations; hundreds of thousands of loyalty and
fuel cards; the sales and marketing functions for fuels, lubricants, lPg, chemicals and other
products; supply and distribution to 18 airports; and the in-country manufacture of lubricants.
More than 440 staff would be transferred.
some of the major’s subsidiary businesses in the market were sold by a share sale. its aviation
business was spun off into a new joint venture. the lubricant blending plant was sold with a
blending agreement to manufacture products to the major’s formulae. a licensing agreement
was needed so that the oil major’s cards would continue to be accepted. and all of this had to
meet complex tax and reporting regulations.
we were involved in all aspects of the divestment, from business consulting and change
management to it. the technological changes involved carving out business support and
operational aspects from the major’s erP system, changing banking connections, creating a
blending model for the licensed products, moving the loyalty cards to a stand-alone platform
and ensuring that the fuel cards could continue to be used post-divestment. and everything
was tested and then tested again.
in all, 350 it users were trained and moved to a new system involving 170 applications and all
the relevant data. while all this was happening, the major’s business was not disrupted and we
improved its remaining it by introducing best practices.
this large project was very successful and delivered precisely on deadline, not only through our
technical and business expertise but because we took time to understand both the seller’s and
the buyer’s cultures – which meant any issues could be raised openly and dealt with promptly.
Mergers, acquisitions and divestMents

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a question oF Brand
in retail, brand can be a huge bargaining chip. establishing a trusted brand takes time and money.
unless they already own or have the rights to another good brand, potential acquirers of a petrol
station group may demand a brand licence as part of the agreement to buy the stations.
For majors, this creates both problems and opportunities. the major may wish to leave a market
completely or move its brand to a different group within it, which means that it may have to accept a
lower price – or not get a sale at all.
if the major is happy for the new group’s owners to use the brand – and gets a higher price for the
sale as a result – it will have to ensure that its brand guidelines are rigidly adhered to or risk a fall in its
brand reputation. that involves inspections, training sessions and legal costs but can ensure outlets
for the brand’s fuels and lubricants.
typically, there will be a licence for three to seven years in a divestment or acquisition in which a
brand plays a key role, with a review to follow. By the end of the licence term, market conditions may
have changed and one side or the other may decide not to renew.
tHe role oF it
in financial terms, it in a large acquisition or disposal is neither a deal-breaker nor a major expense.
the it element of a €1.2 billion deal, for example, can be expected to be somewhere around €10
million, or less than one per cent of the total. the big money sits in the capital assets or real estate.
But it can make or break the success of an acquisition and, if it is not handled properly from the
start, cause problems that delay the deal and lead to spiralling costs. it is also part of changing the
way people work as a result of an acquisition, which has strong implications for Hr.
For the seller, it is a priority to separate it as soon as possible, which means hiving off all the data
used by the organisation being sold, from operational and financial data to taxation and legal
information, usually via a share sale.
speed is also a priority for buyers, who want control of data and the way it is handled so that they
can change business processes. depending on the shape of the deal, it may also be cheaper to
move to a data break as soon as possible. For example, the seller may charge for use of its large erP
system, while the buyer may want to use a much smaller – and cheaper – system.
even so, different companies take different approaches. For some, pinning down a date for system
separation gives a useful target. others prefer a more cautious approach, with it separation after the
contract is signed. Much also depends on how mature the buyer’s systems are – some need to be
scaled up to cope with additional data.
one approach takes advantage of cloud computing to allow a clean break and subsequent data
transfer. For an oil major’s divestment in the united states, we copied all the data and systems
relevant to the divested company and placed it in the cloud. that way, the buyer had access to the
figures it needed during integration with its own systems but did not link to the seller’s other data.
the full data was transferred to the buyer’s in-house systems later.
Mergers, acquisitions and divestMents

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cloud is becoming increasingly common in Mad projects and can help to speed up completion.
cloud removes it hardware from the project path. it also allows large volumes of data to be stored
and used without the need for a temporary it infrastructure. and, if the deal is delayed or abandoned,
the data can be brought back from the cloud as if nothing had happened.
another option chosen by some of our oil and gas clients is to transfer data to one of our data
centres for hosting and application support, which reduces their it costs and allows them to
concentrate on the success of their company.
cut out, not cut oFF
in a classic case of a management buy-out, a former senior leader of an oil major’s global
lubricants arm spotted a way to increase the profits of a european lubricants business.
the major itself wanted to simplify its overall business and remove the costs of running that
country’s lubricants firm while maintaining a brand presence. it accepted the offer, which was
linked to a brand licence to distribute the major’s products.
we had to manage the process of divesting the business. technically, this involved cloning the
erP system running the lubricants business, which was based in another country, setting up a
new back office infrastructure for the divested business and managing the cut-over of systems
and data to the new owner. we also managed the local and international third party suppliers
and specified what would be needed to support the company post divestment.
the project went to plan and to budget and was delivered on time. neither party’s business
was interrupted at any stage.
tHe HuMan eleMent
changes to business processes and it systems during and after a merger, acquisition or disposal
can transform the way people work, so change management must be factored into the project.
the people in charge need a clear understanding of both the buyer’s and seller’s cultures and
the implications of the deal for Hr. staff who are moving to the buyer need support as they learn
new ways of working. some staff may lose their jobs but their services will be needed until the last
moment – and that takes delicate handling.
Mergers, acquisitions and divestMents

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communications are crucial. People affected by the change need to understand what is happening,
why, and how they will benefit. in one divestment we worked on, maintenance, finance and
procurement staff were initially wary of moving to the buyer’s company. once they understood that
the change meant they would work as a single team instead of in siloed departments, they became
enthusiastic supporters.
the human side effects of merger or divestment need to be considered as well. For example, the
ability of employees in some countries to borrow from banks is directly affected by who they work
for, so it is important to find a way to ensure that staff who are transferred or lose their jobs do not
suddenly find their loans being called in.
similarly, different countries take different approaches to the transfer of Hr records. in some, only a
limited number of records may be transferred. in others, full information, including medical records,
must be passed across.
tiMing
Mergers, acquisitions and disposals in the oil and gas sector can be business dramas – and timing is
important, just as it is in showbusiness.
the strategists or portfolio managers who first spot an emerging trend are in the best position to
obtain maximum value for a deal – there is real first-mover advantage.
in one european market, several majors came to the same conclusion about their refining and petrol
station businesses: they were not making enough profit and needed to be sold. the first to dispose
of its refineries and petrol stations found eager buyers. the second was also able to dispose of
its assets. But a third waited too long. the market had turned and willing buyers were thin on the
ground.
in a very mature industry based on just two commodity products, oil and gas companies have
little room for radical reinvention, except in the way they adapt their business models to changing
circumstances. and if judging the time to change is a fine art, what you change depends on where
you see advantage.
at the moment, the trend in oil and gas majors is downstream divestment – but don’t be surprised
if, sooner or later, one of them sees profit in buying back petrol stations in a fractured market or
reacquiring refining capacity because of a shift in refining’s economic model.
Mergers, acquisitions and divestMents

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wHy work witH logica?
we’ve worked on mergers, acquisitions and disposals of every size in the oil and gas industry, on
deals worth anything from a few million euros to many billions, in single markets and across entire
continents.
we’ve helped buyers and sellers across all five continents to meet their objectives, using our skills
in change and project management, business consultancy, erP management and delivery, testing,
cash management, outsourcing and offshoring to bring efficiencies, cost savings and new business
models that satisfy all the parties.
whatever the scope of a deal, we’re detail fanatics who are committed to the long-term success
of the project. you’d be amazed how many people would forget to redirect their e-mails unless we
reminded them.
a reFined divestMent
a multinational oil organisation’s decision to reduce its refining capacity became an
opportunity for an investment company, when a refinery with a capacity of 90,000 barrels a
day came onto the market.
the site was to be sold as an entire business, including a large underground lPg store, more
than half-a-million cubic metres of oil storage, loading bays that could handle 14 tankers at a
time and 500 staff.
overall, more than 700 it users in the oil major’s and the new company’s business were
affected by taking the refinery out of the major’s worldwide erP system.
we duplicated the major’s erP system and created a new it organisation to receive the data.
that included full training for the bought-out company’s staff in aspects of the system that they
had not needed to understand before. More than 50 applications were affected.
our experience in change and project management, as well as our it, training and testing skills,
meant that, on handover day, the new company was immediately able to manufacture, sell and
ship its products as a separate entity.
We’re turning oil into
a masterpiece
Mergers, acquisitions and divestMents

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Building a divestMent deal
Major’s strategy/portfolio department sees advantage in a divestment
confidentially engages merchant bank and draws up list of potential buyers
it, finance and legal departments privately asked for data needed by potential buyers
First public hint is often the announcement of a strategic review, which may result in a sale,
restructuring of company or sector under review or a decision to do nothing
Project team established – workstreams include Hr and business operations
it asked to examine what is needed to hive off the company or sector and give timings
Potential buyers approached and agreement in principle reached – possible public announcement
data room (virtual or physical) established, where project teams from both sides meet to agree on
how the organisation will be transferred to the buyer
(or, in the case of a joint venture, the shape of the new business)
due diligence – the fine detail covering business operations, Hr, legal, financial, taxation and it
matters
local consultations – for example, France and the netherlands both require consultation of the
works council of any domestic company involved
initial contract signed and target handover date agreed
it work towards target date for separation – work may have been begun earlier
separation at agreed date
seller may provide support services, such as it or marketing, for an agreed period, depending on
the contract
Mergers, acquisitions and divestMents
Mergers, acquisitions and divestMents

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coMPlicating Factors
• Multiple countries or business streams in a deal – more stakeholders
• tax laws – the way a deal is structured or financed can affect the amount of tax paid
• Financial year-ends
• investigations by regulatory or competition authorities, such as the european
commission, nationally or internationally
• Plant shut-downs for maintenance or improvement
• Finance – deals have been lost when the buyer’s promised sources of funds cannot
deliver
• asset sale, sale of company or setting up a new company – an asset sale can be
simpler because historic records may not need to be transferred, creating business
confidentiality problems, while setting up a new entity can be a complex matter
Mergers, acquisitions and divestMents

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under any circumstances be liable for any loss or damage (direct or consequential) suffered by any party as a result of the contents of
this publication or the reliance of any party thereon or any inaccuracy or omission therein. the information in this document is therefore
provided on an “as is” basis without warranty and is subject to change without further notice and cannot be construed as a commitment
by logica.
logica is a business and technology service company, employing 39,000 people. it provides business consulting, systems integration
Logica and outsourcing to clients around the world, including many of europe’s largest businesses. logica creates value for clients by
250 Brook drive successfully integrating people, business and technology. it is committed to long term collaboration, applying insight to create innovative
answers to clients’ business needs. logica is listed on both the london stock exchange and euronext (amsterdam) (lse: log; euronext:
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