M&A appetite highest in oil and gas firms among all industries: EY

The total reported deal value for oil-and-gas transactions in 2017 was US$344 billion, data from EY showed.
The total reported deal value for oil-and-gas transactions in 2017 was US$344 billion, data from EY showed.PHOTO: ST FILE

SINGAPORE - An EY report on Wednesday (June 20) said the appetite for mergers and acquisitions (M&A) among oil and gas firms is at its highest among all industries surveyed, amid a more stable economic growth environment and as companies better assess the threat of competition.

The report showed that 90 per cent of oil and gas executives expect the global M&A market to improve in the next 12 months, up from 43 per cent in April 2017.

This comes as the total reported deal value for oil-and-gas transactions in 2017 was US$344 billion, with upstream deal value at its second highest over the last five years, data from EY showed. Notably, oil majors with significant cash flow needs are divesting mature or late-life assets, even as they actively acquire and consolidate their position in key basins. This is reflected again in the deal profile. In 2017, divestments by the oil majors of over US$23.1 billion was on a par with acquisitions of US$23.2 billion.

"They wish to divest, in order to invest," EY said.

"Fluctuating commodity prices have led to an increased focus on capital allocation for oil and gas companies making long-term investment decisions against a global backdrop of shifting energy trends, changes in both supply and demand and in the wider capital markets."

The environment today has spurred oil companies to assess more frequently than before the markets, asset types, and areas of the value chain that offer the best opportunities. Six in 10 executives in the oil and gas industry review their portfolios at least twice a year, and in turn, more strategic decision-making is coming to the fore. Today, more than 85 per cent of oil and gas executives report that they plan to divest in the next two years.

For nearly all oil and gas executives polled by EY, the top divestment driver is the business unit's weak competitive position in the market, with oil majors disposing mature assets to strengthen their balance sheets and pay down debt.

There is also greater attention on the benefits of technology, with nine in 10 oil and gas companies looking to invest to improve operating efficiency and address changing customer needs. Over 95 per cent are using data analytics to assess the true value of certain assets.

EY noted that there has been the use of "more innovative" deal structures, such as issuing shares in favour of cash. That has helped to drive more deal value.

"Other innovative deal structures that are now being used include deferred and contingent considerations in transactions rather than cash," it added. "This, in turn, implies that more risk-sharing is taking place, as headline valuations are being broken up by risk exposure."

The bullish view over M&A trends also come as 90 per cent of oil and gas sector executives view global economic growth as improving or stable. To be sure, there are risks on the horizon - respondents cite inflation and market volatility as the biggest risks to investment plans, amid rising oil prices and oilfield services looking to renegotiate contracts at higher rates. Oil and gas executives also see political uncertainty and geopolitical tensions as the two biggest risks to growth.