Conservatism drives oil and gas M&A outlook down and appetite for divestment up

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London, 09 May 2012 — The sixth EY Global Capital Confidence Barometer has found that despite higher oil prices, improving access to capital, increasing economic optimism and a generally more favourable deal environment, oil and gas executives are still cautious about engaging in M&A. Just 31% of the 141 oil and gas executives surveyed in April said they expected to pursue an acquisition in the next 12 months, down from 48% in October 2011, and the lowest figure since the barometer began in 2009.

By contrast, the number of businesses looking to sell assets has risen by more than 27% — a clear sign that companies regard portfolio management and a renewed focus on their core business as a priority.

Andy Brogan, Global Transactions Advisory Services Leader for Oil & Gas at EY says “While oil and gas executives are in a more confident frame of mind, they are still applying caution to M&A. Economic outlooks remain uncertain and geopolitical instability continues to be a concern.”

Over half of the oil & gas executives surveyed view the global economy as improving, more than double the 22% in October 2011. Supporting this is the positive current sentiment around corporate earnings and economic and employment growth with 91% of oil and gas companies expecting to maintain or increase their current workforce in the next 12 months.

 Merger and acquisitions outlook

Only 31% of oil and gas executives stated that they plan to pursue acquisitions in the next 12 months, compared with 48% in October 2011. When asked why not, the most common reasons included low confidence in the broader business environment and limited deal and execution capabilities. Thirty-nine percent of respondents expect the price or valuation of M&A assets to increase over the next 12 months while 46% believe that operating cost synergies are the most challenging to delivering deal value.

Brogan comments, “By contrast, the oil and gas companies expect divestment activity to increase significantly over the next 12 months. The percentage likely to sell assets over this period has risen from 20% in April 2011 to 47% in April 2012 highlighting that organizations are remaining conservative and focusing on their core business.”

Impact of the Eurozone

Eighty-eight percent of the oil and gas executives believe that the Eurozone crisis has affected their business. Not surprisingly, companies based in the Eurozone displayed a more negative sentiment towards their local economies than their counterparts across the globe. Respondents saw revenue and margin pressures as the biggest challenges in light of the Eurozone crisis. Of those surveyed, 38% cited cost reduction as their primary focus to manage their Eurozone exposure, more than double any other measure.

Credit conditions improving globally

Eighty-seven percent of the oil and gas respondents view credit availability as stable or improving. Many oil and gas companies have taken advantage of improved credit conditions and a favorable rate environment to strategically use additional leverage and reduce their cost of capital. Seventy-one percent of executives surveyed expect their debt-to-capital ratio to decrease or remain constant over the next 12 months. Forty-nine percent of respondents expect to use debt to finance deals, up from 30% six months ago.

Brogan comments, “For many oil and gas companies’ growth continues to be of critical importance, with 56% citing growth as their primary focus. If the economic outlook remains relatively benign, then this should feed through into an increased appetite for acquisitions as the year progresses.”

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How EY’s Global Oil & Gas Center can help your business:

The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Center supports a global practice of over 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors.

The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively to achieve its potential.

For more information, please visit www.ey.com/oilandgas or read the Global Capital Confidence Barometer report.