M&A appetite up among oil and gas firms

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

The better economic environment has revived the appetite for mergers and acquisitions (M&A) among oil and gas firms, according to a new report out yesterday.

It found that 90 per cent of energy executives surveyed expect the global M&A market to improve in the next 12 months, up from 43 per cent in April last year.

The finding from an EY survey comes as the total reported deal value for oil-and-gas transactions in 2017 hit US$344 billion (S$467 billion), with upstream deal value at its second highest over the past five years.

Notably, oil majors with significant cash-flow needs are divesting mature or late-life assets while snapping up and consolidating their position in key basins.

This is reflected in the numbers: In 2017, divestments by 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."

Oil and gas companies are making more frequent assessments of the market, asset types and areas of the value chain that offer the best opportunities.

The EY poll found that 60 per cent of executives review their portfolios at least twice a year, and in turn, more strategic decision-making is coming to the fore.

More than 85 per cent of oil and gas executives report that they plan to divest in the next two years.

  • 90%

    Energy executives surveyed by EY who expect the global mergers and acquisitions market to improve in the next 12 months.

Almost all the executives polled by EY said 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 "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 comes as 90 per cent of oil and gas sector executives view global economic growth as improving or stable.

There are risks on the horizon: Respondents cited inflation and market volatility as the biggest concerns as well as 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.

A version of this article appeared in the print edition of The Straits Times on June 21, 2018, with the headline 'M&A appetite up among oil and gas firms'. Print Edition | Subscribe