Global Corporate Divestment Study
Oil and gas watch
Focus on capital allocation leads to robust deal making
Capital allocation is paramount for oil and gas companies that have to make long-term investment decisions against a global backdrop of fluctuating commodity prices, shifting energy politics, and both changes in supply and demand and the wider capital markets.
Companies are constantly assessing what geographies, asset types and areas of the value chain offer the best opportunities. This is reflected in robust levels of M&A activity.
Q: Over the past year, what structures/transactions has your executive board reviewed with respect to a divestment or spin-off?
Embrace technological change
Evolving technology has become a major consideration in the portfolio review process. Nearly a third (32%) of executives say technological change has completely or significantly changed their core strategy, with a further 37% saying their strategy has changed somewhat.
The successful application of horizontal drilling and hydraulic fracturing technologies, for example, has transformed the US energy market. The US has moved from major importer to potential exporter of natural gas in less than a decade. The impact of these technologies has seen oil field service companies base M&A strategies on securing a competitive advantage in new technology.
Overcome two key challenges
Oil and gas companies undertaking strategic divestment identified two challenges to overcome:
- Pricing gaps between buyers and sellers
- Access to capital
A third of oil and gas executives see value disparity between vendor and buyer as the main obstacle to completing a divestment. Commodity price is a key factor in this and natural gas prices, in particular, continue to have wide regional variations. However, oil prices have been trading in a narrow band close to US$100 during the last 18 months — a level of pricing stability that the industry has not seen for 15 years.
For 29% of executives, buyer access to capital is the greatest challenge when divesting an asset. Increasing capital markets activity could see buyers with good balance sheets expand acquisition activity, possibly exploiting the competitive advantage over less well-funded peers. The IPO window reopening has also provided a credible alternative to divestment.
A strong focus on portfolio management and long-term strategy remains crucial as companies in the oil and gas sector determine which non-core businesses or assets to divest.
Americas-based oil and gas company
There are few industries that have undergone as much dramatic change as the oil and gas sector, says the Chief Financial Officer of an Americas-based company operating in the industry. “Horizontal drilling and fracking have made previously unprofitable deposits profitable,” the CFO notes. “These technologies are responsible for the drilling booms happening across the US and Canada, as drillers are now able to access oil and gas deep under layers of rock in these countries.”
Accordingly, the CFO has been involved in a transformation of his business that has seen it completely revamp its core business to keep pace with developments in horizontal and fracking technology. “We consider some units that are based on outdated technologies, and are therefore no longer economically viable,” he says. “This is occurring throughout the industry, as companies seek to rebalance their portfolios to keep up with technological developments.”
As companies navigate the revolution in the oil and gas industry, the portfolio review process has come to the fore. Reviews have proven a valuable tool for identifying acquisitions, growth opportunities and subsidiaries for divestment.
In its most recent divestment, the company’s annual portfolio review process was the main driver, says the CFO.
The company relies on the review to “... quantify the current and future attractiveness of subsidiaries’ markets, units’ competitive positions, cost synergies with other parts of the business and whether or not subsidiaries are part of our core business.”