UK appetite for growth increases but confidence tempered leading to smaller, lower risk investment and M&A, says EY survey

4 November 2013

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  • EY predicts further movement as Oil and Gas Eye index makes gains

Monday 4 November 2013: A rush of IPO activity and improved investor confidence helped EY’s Oil & Gas Eye index to its largest gain in eighteen months during the third quarter of 2013.

The index, which monitors the performance of the sector’s junior companies, posted near double-digit growth of 9.6% in the three months to the end of September. Secondary fundraising among AIM’s oil and gas companies was also up 17% on the figure recorded during the previous quarter.

Feel-good factor confined to a small number of players

However, Jon Clark, oil and gas transactions partner at EY cautioned that the majority of the AIM oil and gas universe was yet to experience a tangible upturn in fortunes.

“Investor interest in riskier stocks may have returned on the back of some positive news on economic growth in developed markets, but the feel-good or perhaps the feel-less-bad factor continues to elude a number of the sector’s smaller players,” he said.

“This is reflected in the fact the Eye has failed to register more than two consecutive quarters of growth since 2009 and the current value of the index is 3% lower than it was at the start of the year,” he added.

Further listings on the horizon

Three new oil and gas companies joined AIM in Q3 following successful IPOs. The report states that the combined £4.6 million of funds raised suggests market conditions remain tough, but Clark believes further listings are in the pipeline.

“Companies still view the broad investor base, liquidity and the access to institutional investors that a listing on AIM provides as an advantage. There has been a discerned shift in investor focus towards IPOs and I would be surprised if more listings aren’t being prepared,” he said.

M&A an option as capital conditions remain tight

Secondary fund raising by AIM-listed oil and gas companies totalled £49.3m, an increase of 17% on the previous quarter’s four-year low of £42.1m. However, just four companies accounted for almost three-quarters of that total.

And Clark thinks that junior oil and gas companies will be compelled to explore the full range of funding options and providers available.

“Equity capital market conditions for most AIM-listed companies remain difficult five years on from the financial crisis,” he said.

“Junior companies will need to refocus their portfolios around core assets or near-term production projects. Others may look to deliver shareholder value through a formal sale process. AIM is likely to welcome some new entrants as 2013 draws to a close, but increased M&A activity means we’re just as likely to bid farewell to several existing members,” he concluded.