Price volatility forces oil and gas to focus on strategic deals

LONDON, Nov. 21, 2014 /CNW/ — Despite an increasingly stable global economy, resilient equity markets and corporate earnings confidence, the global oil and gas M&A landscape remains only cautiously optimistic, according to EY’s 11^th biannual Oil and Gas Capital Confidence Barometer.

In the survey of more than 100 oil and gas executives worldwide, 94% of respondents expect the global economy to either improve or at least be stable over the next year. Confidence in corporate earnings is also on the rise, nearly doubling since October 2013. However, rising geopolitical risks, an increased focus on capital returns and uncertainty over global oil and gas prices have dampened transaction forecasts in the short term.

• 53% see geopolitical instability as the greatest economic risk of the next 12 months
• 62% are primarily focused on optimizing capital rather than investing
• 45% see reducing costs and improving margins as the primary driver of acquisition activity

Andy Brogan, EY Global Leader, Oil and Gas Transaction Advisory Services, says:

“As companies react to the recent drop in oil prices, we are seeing an even greater focus on capital discipline. More and more companies are positioning themselves for growth in this challenging environment by returning to their roots, refocussing their exploration spend and concentrating on core areas.”

M&A outlook: middle market, focus on the core
Ultimately, the appetite to execute deals is cautiously growing. More than half of all oil and gas respondents expect deal volume to increase further in the next 12 months, but only 25% expect to pursue acquisitions in the same time period, down from 30% earlier this year. More than two-thirds of respondents expect their M&A pipelines to expand further over the next year. Importantly, the number of respondents anticipating deterioration in the M&A environment is now negligible.

Transformative M&A — high-value acquisitions that significantly change the size of the acquirer or the scope of its business — will continue. More than a third of respondents are considering such transactions.

However, the strongest growth in M&A activity in the coming year will be in the mid- -sized deals. More than 50% of oil and gas respondents expect maximum single deal values of US$250m or less. At the same time, more than 61% are concentrating on optimizing capital — a sharp reversal from a year ago when companies were primarily focused on investing. Much of this activity will focus on strengthening and expanding core businesses.

Mr. Brogan adds:

“More oil and gas companies are focused on acquiring businesses in their core sectors,. While growth led the strategic agenda for oil and gas companies a few years ago, companies are now much more focused on optimizing the portfolio, controlling costs and managing the risk profile. These companies are assessing a range of transaction drivers, but efficiencies are paramount. Renewed discipline in deal-making is also forcing companies to thoroughly examine many more investment opportunities to find the best strategic fit.”