Deal value decreased 10.8% to US$387.5b in 2019, deal volume fell by 17.7% y-o-y
Portfolio re-balances leaning towards gas-focused and downstream assets
Strong performance in Asia-Pacific with deal value up 219% to US$27b in 2019
Global oil and gas overall deal volume and deal value were down 17.7% and 10.8% respectively in 2019, as stagnant commodity prices, disappointing results, and low returns left the industry searching for capital. This is according to the EY Global oil and gas transactions review 2019, which reveals that the transaction activity and valuations largely reflected the rebalancing of portfolios away from upstream liquids and toward gas-focused and downstream assets. Looking ahead, the report projects that the mergers and acquisitions (M&A) landscape will continue to be shaped by energy transition strategies, climate change regulations and the role of natural gas in the future energy mix.
Andy Brogan, EY Global Oil & Gas Leader, says:
“The oil and gas deal environment continues to reflect uncertainty, as the industry redefines its role and the value of its assets in the face of the growing transition to low-carbon and no-carbon energy. Despite this upheaval, we see an environment in which asset attrition outruns whatever reductions there might be in demand. This means the industry will need to attract capital and offer returns that support continued investment.”
Upstream and downstream deal values were up in 2019 while midstream and offshore services were down
Upstream deal value was up 17.6%. However, if you exclude the two largest deals, value fell 37% from 2018 to 2019 and volume fell 21% over this same time period. The total deal count declined by more than 20%, while the average deal value was US$122m, in line with the prior year. This is the continuation of a downward trend in deal value and deal volume that began in 2017, when interest in what was thought to be undervalued properties peaked following the 2014 downturn. In 2019, interest in US assets fell dramatically, with deal value dropping from US$74b to US$39b, accounting for almost all the value reduction globally.
Since 2015, large corporate deals in the US midstream sector had been remarkably stable (ranging between 105 and 135 deals each year) and the year-to-year variation in deal value were determined by the biggest corporate deals. The trend continued but the big deals didn’t happen, and overall deal value fell by about 55% and the biggest deal in 2019 was ranked as only the ninth-biggest deal in the last five years.
Downstream deal value was up 43% to nearly US$124b in 2019. However, if you exclude the largest deal, value was down 31% and volume fell by 10%. Deal activity in North America and Europe fell 70%, from nearly US$80b in 2018 to US$24b in 2019. Deal volume fell 12%, from 137 in 2018 to 121 in 2019.
In the oilfield services sector, pricing has remained severely discounted since 2014, and returns have plummeted. An initial wave of interest in midsized (US$1b to US$10b) deals, engineered to consolidate assets at what were believed to be favorable valuations, peaked in 2017 and continued to subside in 2019. Deal value fell by almost 27% from 2018 to 2019. Deal volume was equally depressed, falling by almost 20%.
Brogan says: “2019 brought a greater focus on environmental, social, governance and energy transition considerations and these will continue to be key themes for how capital is deployed in 2020.
“In upstream, continued portfolio rationalization for majors will lead to deal opportunities for smaller indigenous independents and private equity (PE) backed entities. In midstream, PE and IFFs are likely to continue to be the driving force for M&A, as companies are expected to remain focused on disciplined capital allocation, and any deviation from this path will depend on access to capital. Downstream, particularly in storage and transportation, may see a flurry of activity as firms are forced to rebalance their portfolios and more clearly articulate their strategies.”
Strong performance in Asia-Pacific with deal value up 219% in 2019
Across Asia-Pacific, total deal value in 2019 was US$27b, up 219% due to Aramco’s US$15b investment in Reliance Industries. Deal volume in 2019 saw a growth of 16% over the previous year. Majority of the deal volume came from upstream, which saw 37 transactions amounting to US$3b. In midstream, there were six deals worth US$3b, while activity in downstream was more robust, with 22 deals amounting to US$20b.
Sanjeev Gupta, EY Asia-Pacific Oil & Gas Leader says:
“In 2019, we saw continued portfolio rationalization by the oil majors, where some exited from investments in Asia and Southeast Asia, leading to deal opportunities for smaller local players. That said, with Southeast Asia being a consumption hub, the downstream sector, especially petrochemicals, retail and lubricants, continues to be a focus for oil majors and national oil companies. As companies in Asia look to retain profitability across the value chain, there is increased focus on optimization of processes and expansion into extended value chain, such as trading. Regional business, financial and industry hubs, such as Singapore, are particularly attractive locations for these oil companies looking to set up streamlined trading functions.”
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