Ernst & Young Q3 Oil & Gas Outlook: Bright spots emerge despite an uncertain economic and regulatory environment
LONDON, August 16: While signs of economic stability surfaced at the close of the first quarter, the oil spill in the Gulf of Mexico, followed by conflicting consumer and business confidence reports, have created considerable uncertainty for the oil and gas industry.
Dale Nijoka, Global Oil and Gas Leader for Ernst & Young, says: “The oil and gas industry is facing some uncertainty right now. Mixed economic data, cutbacks in government spending, potential repercussions of the Gulf of Mexico oil spill and the sovereign debt crisis in Europe are all contributing to a difficult outlook for the remainder of 2010.”
Oil prices are range-bound
Compared to recent years, oil prices have been remarkably constant. More modest consumption habits and weak developed economies have eased demand pressures, creating consistent prices in the US$70 to US$80 per barrel range for nearly a full year. In the absence of any supply shocks or a reversal of economic recovery, prices are expected to remain relatively stable in the short to medium term.
Natural gas economics set to remain challenging
North American gas fundamentals remain weak, driven by fairly weak demand and strong production growth. Globally, we have not seen the kind of demand growth some organizations are expecting for the year. Despite this, producers continue to invest substantially in unconventional gas plays, particularly shale, LNG liquefaction and regasification capacity, suggesting a more positive long-term outlook. However, there remain some challenges to overcome to realize the unconventional reserves potential in Europe and Asia, which means that it may not turn out to be a “game changer” for these regions.
Refining margins strengthen but further restructuring likely
After a very difficult second half of 2009, refining margins have trended upwards and in many regions are back to where they were before the boom of 2005-2008. Nonetheless, additional refinery closures are likely in the US and Europe as new capacity comes online in Asia and the Middle East. Pressures remain on refiners to maintain liquidity and cash flow.
Winners and losers in the oilfield services sector
The Oilfield Services (OFS) sector faced a relatively weak economic environment in 2009, following the decline in upstream spending and downward pressures on utilization and day rates. However, after successfully adjusting to the new financial environment and beginning to show signs of recovery, the sector now has to deal with the repercussions of the Gulf of Mexico oil spill. Despite this, the prospects for the overall OFS sector are set to remain fair for some time yet, albeit there will be winners and losers. Spending by oil and gas companies is expected to increase in 2010 and signs of improvement are at hand as rig utilization rates have ticked modestly upward.
“Even though the events in the Gulf of Mexico have been difficult for parts of the OFS sector, ultimately we expect to see investment in equipment and resources to improve the safety and reliability of offshore and onshore operations. Broadly speaking, this is expected to financially benefit the oilfield services equipment manufacturers, whilst bolstering more technological advances,” said Nijoka.
Oil and gas transactions activity gathers pace
M&A activity in the oil and gas sector during the first half of 2010 increased, with global deal value reaching almost US$135 billion – up almost 50% over the prior year. There were 420 deals announced through the first two quarters, versus 334 deals during the same period in 2009.
Dale Nijoka comments: "Oil and gas M&A activity is starting to increase in the deal markets, and we expect that to carry through to the second half of 2010, particularly in emerging markets. We have seen further consolidation in the OFS sector in the last six months and we expect this trend to continue for the remainder of 2010. Deal valuations will, however, continue to be constrained by a lack of liquidity in debt markets and continued volatility in equity markets. Additionally, the appetite of a number of Asian National Oil Companies (NOCs) for acquisitions that give them access to strategic resources plays remains undiminished.”
About Ernst & Young's Global Oil & Gas Center
The oil and gas industry is constantly changing. Increasing regulatory pressures, price fluctuations and geopolitical complexities all present significant challenges. Ernst & Young’s Global Oil & Gas Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.
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