The FINANCIAL — Just over a third (39%) of oil and gas respondents expect to pursue acquisitions over the next 12 months, up from 27% in April 2013 and a significant majority expect mergers and acquisition (M&A) activity in the sector to increase in the next 12 months, according to EY’s ninth bi-annual Oil and Gas Capital confidence barometer.
“The barometer shows a clear rebound in corporate confidence. After several years of conservative decision-making, executives are steadily moving towards investing and growth. The increase in available credit indicates that conditions are improving globally creating greater opportunities," said Andy Brogan, EY’s Global Leader Oil and Gas Transaction Advisory Services.
According to the survey, the majority of oil and gas respondents (77%) expect that global mergers and acquisitions (M&A) deal volumes will increase over the next 12 months. In addition, 21% advised that deal sizes are likely to be above US$500m, a significant increase from 12% in April 2013. This, coupled with a sharp increase in global confidence underpinned by an increased appetite for acquisition activity, is reflected in the survey with 75% of respondents demonstrating an increase in confidence in the number of acquisition opportunities in the next 12 months. This is a marked increase from 51% in April 2013.
Gaining share in existing markets (79%) and gaining share in new markets (74%) are listed as the top two drivers for planned acquisition activity. For the oil and gas respondents, these market share drivers have been strongly increasing in relative importance over the past 12 months, according the survey. Forty-one percent of respondents also indicated that the regulatory environment remains the primary reason for not pursuing an acquisition, up from 26% six months ago.
The decline in companies planning to make divestments, from 61% in April 2013 to 47%, and an increased focus in enhancing shareholder value, up to 37% from 21% in April 2013, indicates that companies have already offloaded assets that did not fit their portfolios. Optimizing capital allocation and improving performance have grown in importance and are a key success factor for the oil and gas respondents, says the survey.
Divestments are expected to take the form of the sale of a business unit (42%), rather than an IPO of a business unit (26%). This is a different scenario compared to April 2013, when 32% of respondents were considering selling a business unit and 43% believed that an IPO was the most suited form of divestment. In addition, 71% of respondents indicated that execution risks and disruptions to business operations were the main reasons not to pursue a divestment.
Sixty-six percent of the oil and gas respondents indicate that they have a greater focus on growth. Over the past 12 months, the importance of organic growth has increased steadily, indicating a broader economic optimism. Fifty-eight percent of respondents also stated that they will focus their organic growth in lower risk areas, whereas in April 2013, they favored higher risk areas.
“Given the recent volatility in the global economy our respondents are still showing some justifiable caution. That said, the underlying appetite to invest and seize opportunities is higher than it has been for some time so we are most likely looking at an inflection point in M&A activity levels,” said Brogan.
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