EY’s biannual ‘Oil and Gas Capital Confidence Barometer’ has said that 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. The report shows the data from a survey of over 100 oil and gas executives across the world. 94% of respondents said they expect the global economy to either improve or at least be stable over the next 12 months. Confidence in corporate earnings is also on the rise, nearly doubling since October last year. 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.
In numbers the data collected shows that 53% of respondents see geopolitical instability as the greatest economic risk of the next 12 months, 62% are primarily focused on optimising capital rather than investing and 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 said, ‘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, refocusing their exploration spend and concentrating on core areas.’
Ultimately, the appetite to execute deals in the oil and gas sector is growing cautiously, according to EY. Over half of all the respondents expect deal volume to increase further over the next year, but only 25% expect to pursue acquisitions in the same time frame, down from 30% earlier this year. Over two thirds of respondents have also said that they expect their M&A pipelines to expand further in 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 the business, will continue. More than a third of respondents are considering such transactions.
However, EY did find that the strongest growth in M&A activity in the coming year will be in the mid size deals area. More than 50% of oil and gas respondents expect maximum single deal values of US$ 250 million or less. At the same time however, more than 61% are concentrating on optimising capital, a sharp reversal from a year ago when companies were primarily focused on investing. Much of this activity will focus on strengthening an expanding core businesses.
Brogan concluded, ‘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 optimising 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.’
Edited from press release by Claira Lloyd
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