Price Volatility Driving Emphasis on M&A Risk Management
We predict that as buyer and seller perceptions of value in the oil and gas sector begin to align, an increase in merger and acquisition (M&A) activity is likely.
With commodity prices still in flux to some degree, there will continue to be discrepancies in the perceived value of certain assets. Risk and insurance advice, such as, the quantification of historical liabilities, and risk transfer solutions, including warranties and indemnities insurance (W&I), are expected to have an outsized importance to the execution of many transactions.
Quantification of historical liabilities, including insurance and claims cost, will allow buyers to further refine their financial models. Quality insurance due diligence also helps to give buyers and sellers a view on insurable and uninsurable risks that could affect the purchase price, including self-insured losses, capital expenditures, and “run-off” covers, as well as providing a road map of the financial costs of new stand-alone insurance programmes.
Allocating deal risk between buyers and sellers through the use of W&I will also be key. The warranties schedule of a purchase agreement is always one of the most hotly negotiated areas of any M&A transaction. In most circumstances, if a breach of warranty occurs, the sellers are liable to compensate the buyer pursuant to the terms negotiated. W&I can be utilised to help parties bridge otherwise considerable gaps between parties’ perceptions of the amount of liability which the seller should remain responsible for after the deal has completed. Marsh has recently tested the market capacity in the oil and gas space in the APAC region, and found strong appetite from insurers.
For buyers, warranties and indemnities insurance can be used to “top up” their financial protection, often in excess of what sellers are willing or able to offer, and it can also serve as a safer source of financial recourse when investing in unfamiliar jurisdictions.
For sellers, the use of W&I allows the selling shareholders to negotiate a clean exit, allowing sellers to walk away from a deal with little to no financial liability. Following asset dispositions, this enables sellers to distribute or re-invest sale proceeds immediately post-completion.
Issues around decommissioning and remediation are often complex and involve financial, environmental, and technical risks. We take a holistic view of managing these risks, and can craft solutions through a combination of transactional risk solutions (such as contingent liability policies), environmental risk transfer solutions, and sureties to back governmentally-legislated remediation obligations.
Disclaimer: This blog is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as legal advice, for which you should consult your own professional advisers. LCPA No. 17/0056.