2010: A year of highs and lows for the oil & gas sector
- M&A activity up 50% from 2009, IPO activity rebounds
- Oil demand increase second largest in 30 years
- Greater optimism for the year ahead but increased regulatory environment
LONDON 22 December 2010 ― 2010 saw the oil and gas industry in flux; events in the Gulf of Mexico, a changing regulatory landscape and ongoing worries about business and consumer confidence, combined to make this an extremely challenging year. However, M&A activity is up 50% from 2009 and IPO activity has rebounded strongly. As such, with capital expenditure at record levels and with demand returning more strongly than expected, the outlook for 2011 is optimistic.
Dale Nijoka, Global Oil & Gas Leader for Ernst & Young, says: “2010 was a mixed year for the industry. The Gulf of Mexico spill provided an untimely reminder of the inherent dangers and risks within the industry’s operations and the debate regarding deep water drilling and appropriate regulation will continue for some time.
“On a more positive note, capital expenditure is at record levels, encouraged by oil prices remaining at a relatively stable US$70-85 per barrel throughout the year. We’ve also seen high levels of exploration and production, as the leading players look further afield to replace reserves. We’re also seeing significant investments being made in coal bed methane, shale gas and LNG.”
Transaction activity returns to pre-recession levels
M&A activity in the oil and gas industry has rebounded strongly in 2010, with total industry deal value in the first three quarters of the year up by 50% over the same period of 2009. Reflecting the return of larger deals, notably involving the stronger, cash-rich larger companies, the number of deals was up by about 25%.
Dale Nijoka comments: “M&A activity in 2010 has been driven by a number of factors. We’ve seen moves into US shale gas by the big IOCs and we’ve also seen continuing expansion and diversification by the Asian NOCs. Oil majors are continuing to divest non-core assets, particularly in downstream markets.”
IPO activity rebounds
Against a backdrop of signs of recovering investor confidence, 45 oil and gas companies successfully completed IPOs to date in 2010, raising total proceeds of almost US$11 billion. This represents a considerable increase in activity compared to 2009, where just 17 oil and gas IPOs raised a total of US$1.6 billion. In 2010, 11 of the oil and gas IPOs were in Canada and there were eight IPOs on exchanges in the US, six in the UK and four each in Australia and Israel.
Junior companies outperforming their larger peers
Ernst & Young’s Oil & Gas Eye index, which measures the performance of companies listed on London’s Alternative Investment Market (AIM), increased by 42% over the course of 2010 (to date). This increase, following on from an impressive 123% increase during 2009, means that the index has now recouped all of the losses of 2008. At the end of 2010, the Eye index stood at 108% of the level at the start of 2008. Junior oil and gas stocks slightly out-performed the wider AIM All-share index over the course of this year, with the latter rising by 35%. By contrast, Oil and gas companies listed on the London Stock Exchange's Main Market under-performed their junior peers during 2010, falling by almost 4%.
Oil price stability supports investment
Crude oil prices were largely “range-bound” for most of the year in the US$70-85 per barrel range, as markets were reasonably balanced, with strong demand growth met by fairly strong non-OPEC supply growth (from the US, Brazil, Canada, and Russia in particular), and little pressure on OPEC to either increase supply or cut-back further. Annual average prices for crude oil should be about US$15-18 per barrel higher than last year, with most observers expecting another US$5-10 per barrel increase in 2011.
Nijoka comments: “Oil demand is set to increase through 2011, with prices rising correspondingly. There will be pressure for the price per barrel to rise over US$100 but there will also be pressure on OPEC to keep that from happening.”
Natural gas prices continued to slide throughout the year, as supply gains – notably from US shale gas, but also from new additions to LNG liquefaction capacity – outweighed only modest growth in natural gas demand. Natural gas supply will remain more-than-ample over the next 3-5 years and natural gas prices are expected to remain relatively “soft,” particularly in the US.
Oil demand growth surprised many in 2010 and is expected to be the second-largest in more than 30 years, trailing only the increase seen in 2004. As with economic growth, oil demand growth has largely been concentrated in the developing economies, again particularly in Asia. While natural gas demand growth has also been strong in the developing world, the global growth has been modest as the big gas-consuming economies in North America and Europe slowly recover from the recent recession.
Regulatory uncertainty remains very high across the globe. This is particularly evident in the US, where in the aftermath of the Gulf of Mexico spill, activity is still constrained, both in deep and shallow water. Also, the debate continues around hydraulic fracturing and broader questions around energy policy and taxation are in play. In Europe, the serial financial crises have overshadowed the remaining challenges to gas liberalization and have possibly dampened the commitment to climate-change leadership. In Asia, the uncertainties center on China and questions around how far the government will go to dampen energy demand growth or to shift growth between energy sources.
Challenging times for refiners
Refiners saw strong improvement in margins in the first half of 2010, but the strength was fairly short-lived, and margins eroded in the back half of the year. Despite the strong gains in oil demand, refiners remain challenged by excess refining capacity, particularly in the mature markets of North America and Europe. The big integrated international refiners continue to look to rationalize their downstream operations, but willing sellers continue to out-number willing buyers. Notably, 2010 saw the formation via acquisitions of a new large independent US refiner, PBF Energy, whose leadership includes experience with several leading US and European independent refiners.
Nijoka concludes: “These industry developments are challenging the traditional model of vertical integration within the industry. As we move into the second decade of the 21st century we see many of the majors wanting to reduce their exposure to the downstream and focus their efforts and their capital on the search for and development of new reserves. This opens up opportunities for existing players to move into new geographies and for new players to enter the market.”
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