Expect more buyouts in energy field: Report

EY says low oil prices will motivate sellers, and deferring deals no longer a viable option

The low oil prices that are battering the energy sector will lead to more buyouts this year as struggling firms seek help to stay afloat, according to a report out yesterday.

Professional services company EY noted that deferring transactions until prices rise to more viable levels will "no longer be a viable option" for many companies.

"We expect to see more motivated sellers and more consensus on valuations in a period of 'lower for longer' prices," it said. "Consolidation will be driven by overcapacity, intense margin pressures and generally weaker capital markets."

Mr Andy Brogan, EY's global oil and gas transaction advisory services leader, expects the first half of the year to remain quiet, given the lack of change in underlying fundamentals. "But in the course of the remainder of this year, we expect to see changes."

Forced-selling could come into play, as companies that have been resilient at oil prices of US$40 to US$50 per barrel begin to face "insurmountable distress" with prices sinking below US$40, he noted.

The EY report found the total number of oil and gas transactions worldwide fell 33 per cent to 1,363 last year, while total deal value shrank 17 per cent to just under US$380 billion (S$520 billion).

The annual EY report found that the total number of oil and gas transactions worldwide fell 33 per cent to 1,363 last year, while total deal value shrank 17 per cent to just under US$380 billion (S$520 billion).

The fall in volume was most prominent in the oilfield services sector, where deal numbers sank 40 per cent to 193. Deal value slumped 63 per cent to US$26 billion amid a declining rig count and substantial cuts in capital expenditure.

Mr Brogan said the lack of activity was driven by low crude prices coupled with an uncertain outlook.

"The valuation price-gap made it very difficult for sellers and buyers to agree on a price," he said, noting that companies were, at the same time, more focused on management matters like cost-cutting.

But he added: "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. All signs point to a more opportunistic market."

A version of this article appeared in the print edition of The Straits Times on March 30, 2016, with the headline 'Expect more buyouts in energy field: Report'. Print Edition | Subscribe