Consolidation expected as confidence in AIM oil and gas companies dented - EY

19 August 2013

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EY expects further consolidation in the AIM oil and gas universe as industry specific issues including oil price and drilling performance continue to dent investor confidence in junior stock. 

The professional services firm’s latest Oil and Gas Eye Index, which monitors the performance of the sector’s AIM-listed business, fell by more than 12% during the second quarter of this year. This represented the largest quarterly drop in a year and completely wiped out the marginal gains made in the first quarter.

It also saw junior oil and gas companies underperform their larger peers and the wider AIM market, with the FTSE 350 Oil & Gas Producers’ Index and the AIM All-Share Index registering more modest falls of 2% and 5% respectively during the same period.

Jon Clark, oil and gas transactions partner at EY, says: “Brent crude prices temporarily fell below $100 per barrel for the first time in a year during Q2. The weaker oil price environment weighed on the share price of all oil companies, with the juniors faring worst.”

Secondary fundraising plummets

The Eye notes that there has been a shift in investor focus towards Initial Public Offerings (IPOs), with appetite for exposure to opportunities in Africa highlighted by the listing on AIM of two Africa-focused companies during the quarter.

The rebound in secondary fundraising by junior oil and gas companies witnessed in the first few months of 2013 was not sustained during Q2, resulting in a return to a more challenging fundraising environment.

This saw secondary fundraising total just £42.1 million – 76% lower than the total recorded in Q1 2013 and the lowest amount raised in a quarter since Q1 2009. In contrast, the secondary fundraising environment across the wider AIM market improved with the £640.4m raised 21% higher than the Q1 total.

Gap widening between the haves and have nots

Clark concludes: “The lack of confidence evident in the decline of the index had a pronounced impact on overall market demand for the sector and contributed to the very low levels of fundraising.

“We still see a divergence in the availability of capital within the industry with larger players finding sources of finance relatively plentiful whereas the smaller companies are finding things increasingly tough.

“At the smaller end of the spectrum, those companies that can deliver and communicate exploration and commercial success that will crowd the others out. The remaining companies will be compelled to seek out alternative funding routes, which could result in further consolidations as the year progresses.”