M&A appetite surges in oil and gas sector amid renewed optimism

M&A appetite surges in oil and gas sector amid renewed optimism

The FINANCIAL -- Sixty-nine percent of oil and gas executives expect to actively pursue an acquisition in the next 12 months according to the EY Oil & Gas Capital Confidence Barometer (CCB) – an all-time high for the sector since the first CCB was published eight years ago, and represents the highest deal appetite among all sectors surveyed.

With the sector becoming increasingly positive about corporate earnings, credit availability and equity valuations, deal appetite among oil and gas executives notably exceeded the global average (56%), reaching its highest level since 2013. Underpinned by signs of an upturn in the global economy despite geopolitical uncertainty, 96% of oil and gas executives expect the mergers and acquisitions (M&A) market will improve or remain stable over the next 12 months.

Looking ahead, 95% of executives anticipate their deal pipeline to remain stable or increase in the next 12 months.

Andy Brogan, EY Global Oil & Gas Transactions Leader, says:

“Oil and gas transactions activity has continued to be strong through 2017, as companies increasingly look for opportunities to consolidate their position, optimize portfolios and drive cost reductions. Buoyed by supportive market factors, including healthier balance sheets, overall consensus on oil price outlook and private equity firms with money to spend, M&A is likely to be propelled further during the coming months.”

The survey reveals that the majority of oil and gas executives (62%) are seeking to take proactive measures to address the impact of digital transformation, as companies strive to keep pace with sector disruption, including the accelerated deployment of renewables and adoption of electric vehicles. While 40% of C-suite respondents are planning to develop digital capabilities in-house, most (60%) are considering a mix of internal and external capabilities.

Brogan says: “In the past, the oil and gas sector has been slow to adopt digital technologies. However, prolonged low commodity prices are now driving companies to increase their investment in digital technologies to transform business models, address the threat from competitors outside of the sector and manage changing customer behaviors. Companies that embrace the future through convergence with other industries could position themselves ahead of the competition.”

Uncertainty in long-term demand for oil and gas and the pace of disruption and innovation are now compelling oil and gas companies to review their portfolios more often, with 78% indicating that they conduct a review at least every six months. The forthcoming EY Analyst themes of quarterly oil and gas earnings Q3 2017 supports this trend, with portfolio optimization now replacing capital spending guidance as the number one industry theme.

The 17th edition of the CCB also finds that 64% of executives continue to prioritize their existing operations and products to deliver near-term growth, as companies seek to rationalize portfolios and improve efficiency.

Brogan says: “Real-time assessment of performance and return is increasingly being enabled by technology and analytics. Companies that can better identify emerging trends will be better able to re-adjust their portfolios and re-allocate capital to take advantage of new growth opportunities.”

The US and Canada are the top two oil and gas investment destinations, with resilient activity so far in 2017. This has been driven by upstream M&A in US shale regions and a sharp increase in deals in Canada as several companies exited from oil sands. Australia, the UK and Saudi Arabia are also among the top five investment destinations according to the survey.