Oil and gas M&A outlook remains robust despite a decline in 2013
- M&A down by 21% in value to US$337b and by 23% in volume to just under 1400 deals as larger transactions and downstream activity decline
- Uncertainty over future oil and gas price trajectories leads to deals being deferred
- Projections of flat or declining oil price and cost escalation, 2014 is likely to remain challenging
Singapore, 28 January 2014 – Oil and gas M&A activity was significantly lower in 2013 in value and volume, according to EY’s Global oil and gas transactions review. The impact of supply side trends on restricting activity are also likely to continue over the next 12 months.
The review highlights a 21% decline in M&A value to US$337b in 2013, significantly lower than the record high of US$423b in 2012. The total number of oil and gas transactions was also down sharply in 2013 – dropping from over 1,800 transactions in 2012 to just under 1,400 transactions in 2013 – a decline of 23%.
In 2013, there was a reduced willingness to commit to larger transactions. In 2012, 98 oil and gas transactions exceeded US$1b in value, compared with just 70 in 2013. In 2012, there were four “megadeals” with reported values over US$10b, but in 2013, there were only three such deals. In 2012, the combined value of all deals larger than US$1b topped US$309b, while in 2013, deals US$1b or greater totaled only US$241b.
Andy Brogan, EY’s Global Oil and Gas Transaction Advisory Services Leader comments: “The oil and gas sector remains one of the most resilient sectors globally, with an average of four M&A deals per day. It has coped reasonably well with an uncertain economic environment for much of the year but has also been impacted by industry-specific supply side issues.”
On the subdued M&A activity in Asean last year, Sanjeev Gupta, EY’s Asia-Pacific Oil & Gas Leader says: “The fundamentals remain intact as the region continues to battle the twin challenges of growing domestic demand against slowing production. This forces national oil companies to pursue reserves outside the region aggressively. In 2013, the modest M&A activity in Asean is largely supported by US oil and gas companies divesting their assets in the region as they turned their focus back on North America. The surge in outbound interest that we have witnessed in 2012 is missing as the national oil companies focused their efforts to consolidate their overseas assets.”
Normal M&A drivers of portfolio and capital optimization helped upstream to remain the most active segment, with US$237b in announced transaction value from 1,009 deals in 2013, accounting for about 70% of the global totals of both value and number of deals. North America continued to be the dominant region for upstream activity, generating approximately 30% of upstream transaction value and about 53% of the global deal volume. Nonetheless, this was a slight decline in the region’s relative importance, with upstream deal activity in the US dropping as shale gas activity declined, largely a victim of its own success in previous years.
Transaction values and deal volumes in the downstream segment were down sharply in 2013, with reported deal values totaling only about US$14b and only 109 deals. In comparison, segment values totaled US$47b from almost 200 deals in 2012. Ownership change in retail and refining in mature markets continued, stemming from ongoing portfolio rebalance and capital allocation reviews. Growing oil demand and refining capacity, particularly in Asian markets, supported a brighter picture for other markets, albeit with relatively low transaction levels.
According to Gupta, many countries in Asia-Pacific plan to increase or upgrade their domestic refining capabilities with assistance from global major players to reduce the import of finished products. “This will propel overseas investment in the downstream segment. A strong growth in oil demand in Asia-Pacific is expected to lead to an increase in oil storage facilities in the region,” he says.
In contrast to the other segments, activity strengthened in the midstream segment in 2013, with reported deal values rising to more than US$70b (compared with US$60b in 2012, but well below the US$88b seen in 2011), although the number of deals declined from 104 in 2012 to 90 in 2013. With its vibrant and tax-advantaged Master Limited Partnership (MLP) sub-segment that relies on acquisition activity to grow, North America accounted for about 71% of all midstream transaction activity and reported deal values.
After a strong year in 2012, activity in the oilfield services (OFS) segment struggled in 2013, with reported deal values declining by almost 50% to about US$15b, and the number of deals falling by almost 25% to 185. While activity relating to onshore and unconventional suppliers remained muted, driven by the tough operating environment in those parts of the industry, service companies supplying the offshore sector remained in demand.
On the OFS segment in Asean, Gupta adds: “Major efforts by Malaysia to arrest the drop in crude oil production and accelerate natural gas output, together with continued efforts by Indonesia to increase gas output should ensure strong business flow for oilfield service companies over the next few years.”
Looking forward to 2014
The review highlights three significant themes to look for in terms of driving M&A activity in 2014 as Brogan explains: “Capital discipline – 2013 has seen the International Oil Companies (IOC) in particular come under increasing pressure from their equity investors to deliver. With the cost of the mega projects in which the IOC’s specialize under severe upwards pressure this will continue to drive portfolio optimization as they focus their portfolios more ruthlessly than ever before on the areas where they can demonstrate competitive advantage. For some, this may mean aggressive divestment campaigns, for others more innovative financial structuring solutions.”
“The onward march of the national oil companies (NOCs) – one of the interesting features of 2013 is that outbound NOC investment has continued. While some particularly active outbound investors have been less active as they digest their previous acquisitions, others have come to prominence. The overall rise in prominence of NOCs and the continued growth in NOC to NOC partnerships and relationships will continue to drive the shape of the industry.”
“Coming to terms with unconventionals – it is still difficult to fully comprehend the massive impact unconventional technology is having on the industry. From a breaking of the previous decade’s consensus on oil price trajectory, to the ongoing debate about the viability of shale gas basins in different parts of the world, to the potential restructuring of the entire global LNG market, its impact is everywhere. As always with new technologies each wave of innovation will bring with it winners, losers and M&A activity.”
Gupta is optimistic about the M&A outlook for the sector in Asean. “Deal flows within Asean will likely increase, particularly with Myanmar pushing ahead with efforts to attract oil and gas majors. For the rest of the region, outbound interest will be robust with the growing oil and gas demand and the limited domestic supply,” he concludes.
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