Global M&A in the refining sector has remained active over the past 18 months despite record high valuations for refining assets, as discussed in a recent Fitch Ratings report.

In both the United States and Europe, buyers were driven by the need to achieve scale in regional markets, while sellers were motivated by the desire to exit mature markets at high multiples and redeploy cash elsewhere. In North America, a significant portion of downstream M&A activity centered on Canadian Oil Sands, as firms used US refineries as vehicles to gain access to Oil Sands reserves through joint venture, acquisition, or other arrangement. In Europe, activity by strategic buyers (including national oil companies) played a sizable role in the M&A market.

While M&A activity creates several levels of risk for bondholders, its impact must be assessed on a case-by-case issue. For buyers of refineries, the immediate risks include the amount of leverage placed on the balance sheet to pay for the acquisition, as well as the risk of overpaying for an asset at a peak in the cycle. Beyond the initial price paid, acquisitions of refineries which require significant reinvestment (either mandatory environmental upgrades or expensive deep conversion capacity installation) may also limit financial flexibility in the event of a downturn.