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Focus on capital allocation leads to robust deal making

Hydrocarbon Engineering,

According to EY, capital allocation is paramount for oil and gas companies that have to make long term investment decisions against a global backdrop of fluctuating commodity prices, shifting energy politics, and both changes in supply and demand and the wider capital markets.

Companies are constantly assessing what geographies, asset types and areas of the value chain offer the best opportunities. This is reflected in robust levels of M&A activity.

Technological change

Evolving technology has become a major consideration in the portfolio review process. Nearly a third (32%) of executives say technological change has completely or significantly changed their core strategy, with a further 37% saying their strategy has changed somewhat, according to EY.

The successful application of horizontal drilling and hydraulic fracturing technologies, for example, has transformed the US energy market. The US has moved from major importer to potential exporter of natural gas in less than a decade. The impact of these technologies has seen oil field service companies base M&A strategies on securing a competitive advantage in new technology.

Two key challenges

Oil and gas companies undertaking strategic divestment identified two challenges to overcome:

  • Pricing gaps between buyers and sellers.
  • Access to capital.

EY highlights that a third of oil and gas executives see value disparity between vendor and buyer as the main obstacle to completing a divestment. Commodity price is a key factor in this and natural gas prices, in particular, continue to have wide regional variations. However, oil prices have been trading in a narrow band close to US$ 100 during the last 10 months – a level of pricing stability that the industry has not seen for 15 years.

29% of executives hold that buyer access to capital is the greatest challenge when divesting an asset. Increasing capital markets activity could see buyers with good balance sheets expand acquisition activity, possibly exploiting the competitive advantage over less well funded peers. 

Adapted from a report by Emma McAleavey

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