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Oil and gas capital confidence barometer: Part one

Hydrocarbon Engineering,

According to the EY Capital Confidence Barometer, despite an increase of disruptive geopolitical influences, greater confidence in global economic stability lays the foundation for future M&A.

Macroeconomic environment

While fewer executives today believe the global economy is improving, the number that believe the economy is stable has more than doubled. Greater confidence in economic stability allows companies to plan more freely for growth and M&A, and stability is an essential ingredient in a healthy M&A environment. Another positive signal is that the number of those who believe the economy is declining has dropped to negligible levels.

Although they do not expect major shocks to the economic or financial system, respondents identify geopolitical instability as the biggest potential threat to their business. Driven by tensions between Russia and Ukraine, the unresolved Iranian sanctions issue, the Ebola epidemic in West Africa, spreading conflicts and extremism in the Middle East, geopolitical issues figure more prominently than they did six months ago. In contrast, concerns about slowing growth in emerging markets have lessened.

The number of executives who are confident about the outlook for corporate earnings has more than doubled over the last 12 months. Confidence in credit availability and short term market stability was also up strongly for oil and gas executives.

Improved sentiments are driving hiring intentions. Oil and gas companies are significantly more confident about hiring than they were six months ago: more than half (54%) expect to create jobs or hire talent, up from 37% in April 2014. The number of companies planning to reduce their workforce has dropped to 5% from 15% six months ago.

Corporate strategy

According to EY, for oil and gas companies, the focus on growth is distinctly tempered by a disciplined approach to cost reduction and operational efficiency, as executives remain mindful of lessons learned during the global financial crisis. Fewer companies are preoccupied with maintaining stability and even fewer are focused on survival.

In line with growing confidence in global economic stability, companies are taking on more risk as they expand their core businesses by changing the mix of products and services. EY’s survey shows a fivefold increase from a year ago in the number of oil and gas companies changing their product mix.

This reflects a pattern of complex activity where companies are divesting non-core units and strengthening and expanding their core and complementary businesses through sophisticated transactions, such as asset swaps, spinoffs and joint ventures.

However, capital allocation to M&A remains measured and disciplined. Oil and gas companies are not planning acquisitions at the expense of organic growth. Rather, they can be expected to pursue only those deals that are aligned to their strategy.

Shareholder activism

The C-suite agenda, in particular the organic and inorganic growth priorities, is increasingly being swayed by the growing influence of shareholder activism. In the past year, activists at several major US oil and gas companies have forced modifications in the strategic direction of the company.

With growing success and greater influence, activist investors continue to rise in prominence as the market enters a new phase of low but stable growth. Cost management, portfolio optimisation and returning cash are key areas of focus. M&A will also likely to part of the story with asset sales and acquisitions as part of the ever broadening activist dialogue. As a result, companies are stepping up their efforts to manage shareholder activism, enhancing communication with stakeholders, monitoring signs of activist pressure and performing ongoing portfolio reviews.

Global megatrends

The survey suggests that oil and gas executives expect global megatrends – particularly shifting work patterns, new government strategies and digital transformation – to have a significant impact on their business and acquisition strategies.

The oil and gas industry is confronting what is often called ‘the great crew change’, as the ‘baby boom bubble’ that dominates most senior leadership teams moves towards retirement. Driven by changing expectations and needs by both employers and employees, the traditional talent contract is also being rewritten. An increasing number of mobile, more tech savvy workers are changing the nature of work and the workplace. The move to a more flexible workforce in conjunction with the digital transformation will provide more opportunities for collaboration and productivity, as well as acquisitions. Dealmaking in many parts of the industry, especially those that are high tech or IP-rich, will centre on the battle for talent.

Governments worldwide are rethinking their strategies and policies in response to huge challenges. From building social safety nets in key emerging markets to reducing deficits and debt in developed countries, governments are trying to meet these challenges without dampening economic expansion. These changes have far reaching implications for business, creating an urgent need to stay agile, keeping up with policy changes and ensuring compliance and collaboration with public sector agencies.

In contrast to the overall trend toward a focus on the core, technology assets are in demand in nearly every sector. Emerging technologies are combining with advanced networks, computing and new ways of communication to fundamentally change businesses. In oil and gas, there is a continued push to develop and implement new technologies to improve recovery, increase efficiency and reduce costs. Additionally, the ‘digital oilfield’ is creating dramatic efficiencies as well as opportunities. As companies adapt to these advantages, dealmakers in all industries will need to decide how they strategically invest in technology.

Adapted from a report by Emma McAleavey.

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