Ernst & Young Oil and Gas Eye Index experiences biggest quarterly drop since 2008 Increase in oil and gas M&A expected as Q3 2011 sees funding conditions deteriorate and 2010 AIM gains eroded
24 October 2011: Ernst & Young’s Oil and Gas Eye Index fell by 26% during the third quarter of 2011; the largest quarterly drop in its value since quarter four 2008.
The index, which monitors the performance of AIM-listed oil and gas companies, has been in decline since the start of the year, all but wiping out the gains achieved in 2010.
In a nod towards increased mergers and acquisitions activity, fundraising fell for a fourth consecutive quarter. Jon Clark, oil and gas partner at Ernst & Young, predicts: “Those companies with weaker balance sheets and particularly those with development projects looming will be looking towards larger, better capitalised acquirers. The pending acquisitions of Dominion Petroleum by Ophir Energy and EnCore by Premier Oil can be seen as M&A bellweathers.”
Future listings postponed as fundraising declines
Three new companies – Bluebird Energy, Enteq Upstream and Bayfield Energy – joined AIM during the quarter, raising £71 million. However, Clark believes they are exceptions as listings stall.
“These three companies may have completed IPOs, but the outlook for the remainder of the year is less positive with many planned listings being postponed until 2012,” he said.
Secondary fundraising by Aim-listed oil and gas companies totalled £168.7m during quarter three, 48% lower than the amount raised in the comparable quarter of 2010 and 37% lower than the figure raised in the previous three months.
Over three quarters of that total relates to a single company – Gulf Keystone Petroleum – with no capital raised by 90% of all Aim-listed oil and gas companies. This was mirrored across the wider AIM market, with the £413.8m raised less than half of the £954m raised in Q2.
Clark added: “Fundraising activity largely occurred at the start of the quarter, with conditions deteriorating as summer progressed. The slowdown in the global economic recovery and the market turbulence created by issues including the US credit downgrade and the eurozone sovereign debt crisis will continue to turn investors off riskier assets. This doesn’t bode well for quarter four.”
Junior oil and gas companies outperformed by larger and sector peers
The FTSE 350 Oil and Gas Producers’ index also fell over the period, albeit by a more modest 13%. However, junior oil and gas companies were also outperformed by their peers in other sectors, with the FTSE AIM All-Share index falling by 19% in quarter three.
“This maintains the trend set in previous quarters and highlights investor flight from stocks carrying greater downside risks,” said Clark.
He concluded: “Companies that have taken advantage of recent funding availability can focus on delivering the exploration potential that has attracted investors to AIM with the added potential of seeing themselves well positioned for opportunistic acquisitions. Those that missed the window need to carefully consider the options available to them to meet their capital needs.”
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