The totality of caving oil prices is beginning to take on a fairly ugly shape.

With WTI at $54, the life is being choked out of acquisition and divestitures (A&D). Budgets are also being slashed and a quarter of North American rigs may be mothballed in 2015.

Some deals already underway are being shelved. Potential buyers are shrinking from transactions. And sellers’ asking prices will vary widely with offers buyers throw out.

Deal makers will likely be opportunists with the wherewithal to pick off assets amid uncertainty or at distressed companies.

“Weak oil prices through 2015 will ratchet up the pressure on the most financially stretched in the sector,” said Luke Parker, principal analyst for Wood Mackenzie’s M&A analysis, in a Dec. 18 report. “Expect to see falling deal valuations and the emergence of a true buyers’ market.”

On Dec. 17, for instance, Sheridan Production Partners said it raised $1.5 billion in investment capital to buy U.S. onshore producing oil and gas properties—on the cheap.

Lisa Stewart, Sheridan founder and chairman, said falling petroleum prices create opportunities for the firm as companies seeking to pay down debt and “sell mature properties with predictable production that fit our successful business strategy.”

Wood Mackenzie said A&D won’t recover until a new consensus emerges perhaps three to six months after prices stabilize.

The year to come may be more about survival than winners and losers.

Budget of a thousand cuts

So far, analysts see few cheery prospects in 2015.

The pending $35 billion Halliburton (NYSE: HAL) and Baker Hughes Inc. (NYSE: BHI) deal should be a good combination “coming out of the abyss,” Bill Herbert, managing director and co-head of securities for Simmons & Co. International. More such deals may materialize in 2015, Wood Mackenzie reported.

But given the climate, Baker Hughes isn’t attractive on its own, Herbert said.

Buying Baker Hughes stock makes sense under the belief that the Halliburton deal will be consummated. Halliburton trades at about $40 and Baker Hughes at about $55.

Buying the stock could lead to arbitrage from future Halliburton stock. At current prices, the merger suggests an ultimate price of $63 per share.

Otherwise, Herbert said he has hacked estimates for large cap service companies, predicting a 25% reduction in activity across the board.

“While we assume a 520 Lower 48 land oil rig reduction, 400 of those rigs come off in the first half of 2015,” Herbert said in a Dec. 19 report. That will mean a slow recovery in the second half of the year.

Herbert said that year-over-year revenues could decline 21% and North American rig counts by 23-24%.

But compared to the cuts that the industry has already seen, there is only more to come.

At $60 per barrel only three of the top 40 International Oil Companies (IOCs) generate sufficient free cash flow to cover spend including distributions.

Globally, the industry faces a 37% spending cut to maintain 2014 debt levels, should Brent remain at $60 per barrel in 2015, Wood Mackenzie said. Additional slicing would go above and beyond the $9 billion in cuts companies announced in the past few weeks.

Wood Mackenzie said spending would need to be cut across the sector by $170 billion at $60 per barrel to keep net debt flat. The U.S., the largest E&P spender globally, had an estimated 2014 capex of $156.2 billion, according to Barclays. A cut of the proportions suggested by Wood Mackenzie would carve out roughly $50 billion.

“Operators in an intensive development phase have the least optionality to respond,” said Fraser McKay, principal analyst for Wood Mackenzie’s corporate analysis, in the report. “Most other IOCs have flexibility to rein in spend to keep finances on an even keel. But shareholder dividends and distributions are likely to be a significant part of the spend cuts for some companies.”

Barclays said capex cuts will be deep, but more likely at about 25% for U.S. E&Ps. Large-cap E&P cash flows will fall 20-25% in 2015, said Thomas R. Driscoll, analyst, Barclays, in a Dec 16 report. Nevertheless, U.S. lower 2015 spending will trim oil growth only modestly.

“Large-cap E&Ps are positioned to compete at $60-70 oil,” Driscoll said. “Liquidity appears manageable for most mid-cap E&Ps. Drilling economics in the U.S. tight oil plays will be stressed at lower prices, but we think the independents and the large E&Ps in particular, are positioned to deliver strong returns on incremental capital.”

Wood Mackenzie's report also noted:

  • M&A:
    • Market liquidity likely to fall; distressed sellers and other opportunities will emerge for cash-rich buyers;
    • Large-scale corporate consolidation may be closer than it has been at any point since the late 1990s; and
    • History shows that value creation through M&A is largely driven by commodity prices: For buyers that believe in long-term oil above $80-90/per barrel, 2015 could be a year to go long.
  • Strategic themes: Impact on investment, exploration and M&A:
    • Pre-FID projects: $127 billion of global industry greenfield investment in 2015 at risk of deferral; and
    • Exploration: Mature, lower-risk plays will draw spend from high-cost, high-risk frontier.
  • Shareholder distributions are under pressure at current oil prices:
    • Buybacks: Majors’ programs at risk due to lack of free cash flow;
    • Dividends: Some independents likely to follow Canadian Oil Sands and cut; others will seek to sustain in the near-term; and
    • Market ratings: Share prices imply $75/per barrel Brent long-term after steep falls.