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As crude price takes further hit, oil and gas transactions may rise

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Hydrocarbon Engineering,

More oil and gas companies are expected to succumb to stress in the sector, which will drive transactions in 2016, after global deal volume and value fell short of expectations in 2015, dropping by 33% and 17% respectively year on year.

EY's Global oil and gas transactions review 2015 has found that deal volume was down in nearly all sub-sectors in 2015 compared to 2014, most notably in oilfield services (OFS), where deal activity decreased by almost 40% from 320 - 193, and in upstream where deal volume dropped from 1467 in 2014 to 910 in 2015, a 38% decline.

Deal value was similarly depressed across most sub-sectors with OFS leading the pack with a 63% decline from 2014. Total value did, however, increase by 57% in the downstream sector following a number of sizable transactions involving refining assets in the US.

Andy Brogan, EY Global Oil & Gas Transaction Advisory Services Leader, said, "Declining crude prices coupled with an uncertain outlook challenged transactions in 2015. Now, with greater consensus around a 'lower for longer' outlook shrinking the valuation gap between buyers and sellers, we'll likely see more deals come together this year. Companies that have shown resilience amid US$40 – 50/bbl of oil are beginning to face insurmountable distress as the price sinks below US$40. All signs point to a more opportunistic market for M&A activity."

Portfolio optimisation to continue

Upstream companies are pairing their ongoing focus on cost cutting with high grading their portfolios. This may lead to a consolidation of ownership around core assets as companies seek to increase control over their overall capital outlay and maximise opportunities to use their operational capability to deliver value. That consolidation will also cascade into the OFS sector.

Brogan said, "Excellence in operational and project execution remains essential not only to success but to survival in the global oil and gas sector. The traditional energy business model has been forced to flex to a new 'resource abundant' world."

Mega-mergers and follow on M&A activity

Consolidation, which began in 2014 with several megadeals, will continue this year with significant follow-on activity as merged companies are forced to sell businesses following regulatory pressures.Brogan said, "Large scale consolidation presents many challenges due to the complexity of businesses involved and anti-trust issues that arise. Megadeals are most likely to emerge in the upstream space with OFS companies following suit in order to meet new demands."

Vertical integration

Vertical integration is also high on the agenda for OFS companies seeking to build full-service delivery capabilities to meet operators' increasingly demanding price and delivery expectations. There's an opportunity for equipment manufacturers, as well, to acquire suppliers and recover aspects of the value chain traditionally outsourced to low-cost regions like China and India.

Deployment of private capital

Renewed interest from a wide range of financial players, not only distressed funds but also private equity firms, family offices and infrastructure funds, have been increasingly active in the sector. Depressed oil prices will continue to unearth opportunities for these investors to expand their product offering and to diversify their activities in the market.

Adapted from press release by Francesca Brindle

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