In this Transformation Age, do you compete or collaborate?


Andy Brogan

EY Global Oil & Gas Leader

Oil & Gas sector leader, speaker and industry advocate, optimist, music addict and avid traveler.

13 minute read 11 Feb 2019

Midstream and downstream drive transaction total value higher in 2018, while expectations for 2019 deals remain positive.

2018 was a rollercoaster year in oil markets. We began the year with high hopes that the price recovery that started in early 2016 would continue and bring us to a sustainable point of balance between supply and demand. We ended the year with the realization that the world is unpredictable. As of this writing, oil prices are around where we started in early 2015.

The transaction environment for the past three years has reflected adjustment to the perceived new normal and the anticipation of a recovery. Few people expected prices to get back to US$100 per barrel, but no one thought that US$50 was sustainable. Upstream assets changed hands as market players rebalanced their portfolio of risks in light of economic shifts. Capital moved midstream and downstream as companies strove to insulate themselves from commodity market uncertainty and mitigate egress challenges.

No one knows how 2019 will play out in the commodity markets. The stand-off between the resolve of OPEC+ and unconventional assets in North America will be an important focal point. The latest move in crude oil prices will push assets toward owners who can fund development, notwithstanding swings in returns and cash flows.

Downstream, the driving force will be a continued expectation that petrochemicals will be an important source of new demand and that marine bunker fuel requirements will put increasing pressure on the refining sector. New capital will be required and, inevitably, that means transactions.

Oil Rig late evening
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Chapter 1

Expectations for capital spending in 2019 remain restrained

M&A to continue as a key driver of the demand for capital, with a slight increase in the percentage of capital spent by oil and gas firms on 2018 cash acquisitions.

The raising, deployment and return of capital, particularly in the upstream segment, have always been a key indicator of market conditions and a driving force in the oil market outlook. As confidence waxes and wanes, the demand for growth capital grows and shrinks.

The level of capital raised has stabilized in recent years but hasn’t fully recovered to amounts seen before the 2014 oil price crash. Industry experience in the aftermath of 2014 also resulted in a much-needed focus on capital discipline. Supported by rising commodity prices through most of the year, companies have been able to fulfill that promise in large part. 

Capital raised by select oil and gas companies in 2018 remained flat at a five-year low, and capital expenditures as a percentage of operating cash were at a five-year low as well. To a large extent, this trend was enabled by stronger commodity prices and more plentiful operating profits; at the same time, capital spending increases were modest as firms (as promised) were judicious about spending capital.

We expect capital spending in 2019 to remain restrained — the retreat in commodity prices at the end of the year underlined the need for flexibility in planning and budgets.

Oil and gas companies’ portfolios are evolving, with investments in alternative/renewable energy, utilities, technology and shifting hydrocarbon plays all featuring on the strategic agenda. The financing sources in the current landscape are also evolving.

The industry downturn, while difficult, has driven the global oil and gas industry to become more cost- and capital-efficient. Although investors continued to receive steady dividends through the downturn, earnings in 2018 have now reached a level sufficient to support dividends and capital expenditures, perhaps reducing the need of companies to turn to the capital markets or at least giving investors confidence that capital is perhaps aligned to delivering growth rather than supporting a dividend stream.

According to IHS, the oil and gas industry is expected to register a year-over-year growth of 9% in its ordinary dividend payments, amounting to about US$187.9b, in 2019.

Central banks are stepping back from the free flow of money that started in 2008 with the global financial crisis. The abundance of cash enabled strong economic growth, consistent oil demand growth and capital investment. Rising interest rates are a potential threat to economic growth, oil demand and the demand for external capital by oil and gas companies.

M&A is expected to continue as a key driver of the demand for capital. In 2018, the percentage of capital spent by oil and gas firms on cash acquisitions ticked up slightly, although it is considerably below the peak it reached in 2016 at the trough of the last commodity cycle. Consolidation of oil firms is expected to grow. According to the EY Global Capital Confidence Barometer, about 94% of oil and gas executives expect the global M&A market to improve in 2019.

Oil Rig late evening
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Chapter 2

Market remains confident in upstream assets despite deal values and volumes declining

Upstream characterized by moves to provide more efficiency and optionality within portfolios in 2018.

On average, oil prices were higher in 2018 than 2017. The year ended with an almost-complete retreat from the gains of the last two years, which no doubt affected reported overall global M&A activity levels. Upstream deal values declined from US$164.8b to US$130.3b, and deal counts declined 26%. Other factors impacting M&A activity included a more disciplined approach to capital deployment, with upstream players focusing on their highest productivity capex-related investments and reducing debt.

Debt-to-equity ratios continued the downward trend they’ve been on since the price collapse in 2014, driven by stronger player consolidation and restructuring. Despite the much-talked-about transition from oil to gas, this did not seem to translate into gas-specific transactions activity; indeed, the proportion of these deals declined from 21% to 13% over the year.

Upstream deal value


decline in 2018, with total deal value of US$130.3b.

As in 2017, the US led the way in terms of deal value and volume, comprising 60% of total upstream transaction value in the year. 2018 was characterized by mixed activity levels in other regions. 

Although 2017 saw a continued shift from growth to value, where companies realigned portfolios to take advantage of new capital allocation realities and transaction opportunities, 2018 was characterized by moves to provide more efficiency and optionality within portfolios. The increase of mergers and joint-venture structures exemplified this.

The specific objectives of each deal vary, but an overall theme has been to drive efficiency, increase profitability, and provide future development and expansion options in locations with lower market access risk. 2018 also saw supermajors aligning portfolios to provide increased optionality.

Notwithstanding the retreat in oil prices, the market seems to have confidence in the prospects for upstream assets. Month-to-month and year-to-year, commodity markets will move unpredictably as trade wars, interest rates, economic growth, political violence and the response of OPEC+ (as the market balancer) push and pull against each other.

Overlaying all of this are the economic fundamentals, which remain strong. The world will need oil and gas to fuel its present as it moves toward a lower-carbon future. As that happens, companies will be constantly rebalancing their portfolios as their view of speed and nature of the transition evolves.

Offshore construction platform production oil gas
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Chapter 3

Biggest year for midstream transactions

US tax regulation changes drive corporate simplification and company restructures and consolidation of affiliates.

Of the past five years, 2018 was the biggest for midstream transactions and represents the largest total deal value for oil and gas transactions. North America dominated: 95% of all deal value and 19 of the top 20 transactions by value were in the US and Canada.

Midstream deal value


of deal value in 2018 came from North America.

Corporate simplification, pipeline politics and bottlenecks, and private equity investment dominated midstream transactions in 2018.

Corporate simplification drove almost 75% of the total deal value and a fifth of the deal volume as companies restructured and consolidated their affiliates because of changes in US tax regulations. Companies continued to focus on lowering capital costs, increasing capital access and improving balance sheets to position for infrastructure expansion.

Continuing the MLP capital structure reset trend from 2017, US$140b of total announced deal value, including the top 10 deals by value in 2018, was driven by corporate simplification and capital restructuring. With capital restructuring nearing completion for most of the North American major midstream players, 2019 should allow for a renewed focus on portfolio rationalization and growth.

Although, the oil and gas sector benefited from stronger prices in 2018 globally, pipeline bottlenecks caused localized differentials to widen to record highs.

We anticipate further transaction activity in the US to support an investment upward of US$120b over the next six years to address US pipeline bottlenecks. This will likely be supported by continued PE investment.

Keeping up with 2017’s trend, PE players continued to seek positions and assets in advantaged midstream infrastructure. They more than doubled their 2017 deal value, with US$12b in transaction activity. As long as financing conditions do not change materially, this trend is unlikely to abate as competition for a share of the critical and steadily growing infrastructure pie continues into 2019.

With over 95% of 2018 midstream deal value in North America, most midstream transactions for the rest of the world were dominated by LNG and pipeline assets.

For many, 2018 was the year that continued delays on critical infrastructure projects came home to roost, with record-high price differentials and price volatility. North American transaction activity across oil and gas slowed in the last quarter as companies and investors waited for things to settle.

We believe that the major wave of midstream corporate simplification is now complete, which will result in midstream transaction value and volume cooling off in 2019 as the market goes back to classical deal drivers: connecting producers and products to markets. Private equity is likely to continue to invest as it seeks stable, rateable returns and provides a source of much-needed capital for the major infrastructure investment required.

Overall, we believe there will be focused investment in crude oil gathering and field gas processing in the better-positioned North American shale basins. International players may continue to re-enter the market through acquisitions, although political tensions with China may cause some delay. Capital-starved E&P companies may seek to divest their midstream infrastructure as they refocus on upstream. 

The continued preference toward cleaner energy will drive interest in natural gas and LNG. In the longer term, we see more nations pressing for fuel oil power generation conversion to natural gas, which will drive LNG development infrastructure.

Aerial view oil tank storage transport
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Chapter 4

Downstream activity at historically high levels

Downstream companies continue to adjust their portfolios and integrate across the value chain.

Downstream activity in 2018 was at historically high levels. Deal values reached US$82.5b (up 11% from 2017), with deal volume of 172 transactions (also up 11% from 2017). Consistent with past years, North America and Europe continue to be the most active regions, representing 92% of deal values and 73% of deal volume. The majority of deals were in the range of US$100m to US$1b.

Downstream deal value


increase in 2018, with total deal value of US$82.5b.

In the 2017 edition of this publication, we noted that companies and investors have a renewed focus on integration, due in part to lower and more volatile oil prices and companies’ desire to strengthen cash flow and returns across the commodity cycle. This trend continued in 2018 as companies looked to adjust their portfolios and better integrate across the value chain, from feedstock supply to petrochemicals. We expect this trend to continue in 2019 and beyond as changes to supply and demand continue.

A key development that should drive transaction activity during 2019 is the upcoming International Maritime Organization (IMO) 2020 regulation, which limits sulfur in marine fuels to 0.5%. This is likely to shift demand from fuel oil toward middle distillates and may lead to additional investment in refining and tank modifications.

The level of transaction activity in North America was robust, with deal values of US$63b (up 55% from 2017) and transaction volume of 85 (up 49% from 2017).

Within EMEIA, the focus on integration was clearly evident during 2018. Despite improvement in oil prices during the year, there did not appear to be any discussions around the spin-off of downstream assets. The primary focus was on competitive cost of supply (either via advantaged feedstock or access to end markets) and differentiated product offerings. 

Despite improved profitability of Western European refineries due to lower crude prices, M&A appetite for refining assets remains limited due to pressures from refineries in the Middle East and India, and the inherent volatility in cracks and crude spreads.

Transactions involving terminal and logistics assets remained strong during 2018. Storage terminal operators continued to rebalance their portfolios due to overcapacity and general market backwardation. Furthermore, several investments by infrastructure funds reached the end of fund life during the year.

In natural gas infrastructure, there was continued interest from infrastructure and pension funds, given the growing demand for natural gas and LNG in Europe.

Offshore oil rig worker calibrating coriolis digital flow meter
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Chapter 5

OFS sector faces a challenging market

Consolidation and integration continue to drive the agenda

Despite the volatility of 2018, the oilfield services (OFS) sector leaves the year in a similar position to the one it was in at the start of it. What has stayed the same, what is changing, and what has changed? At the top of the list of things that have stayed broadly the same is the market. Despite price gyrations, the operators have continued to pursue the strategies they adopted in response to the oil price decrease, including:

  • Capital discipline — with capex budgets holding flat or having only marginal growth
  • Reluctance to allocate capital to exploration and long-lead-time projects
  • Focus on the accessible cost-advantaged basins
  • Relentless focus on cost control and production performance

What is changing or has changed? These changes impacted the OFS sector during 2018:

  • The oil and gas price outlook
  • Accelerating rollout of new technology and digital technology
  • Tightening US monetary conditions
  • Transition of operator ownership in mature basins

Oilfield services deal value


decrease in 2018, with total deal value of US$21b.

Together, these factors leave the OFS sector in a challenging place. While the threat of insolvency has receded for most, the challenge of delivering an acceptable return to investors remains. The sector struggles to articulate how it will deliver the kind of earnings growth that could support a higher valuation, despite improved financial performance. OFS companies’ responses at the moment comprise of a combination of the following:

  • Focus on technologies or activities in which they have the kind of competitive advantage that supports activity and acceptable margins
  • Extend the scope of integrated service offerings that can attract premium pricing, if scale permits
  • Where a definitive technological or operative advantage cannot be sustained, build scale to enable a lower cost base that can allow sustainable margins; where possible, use digital technologies to control costs, too
  • Engage with the operator’s technology agendas

The implications for the M&A agenda continue to be:

  • Consolidation by activity or area to drive competitive advantage and costs
  • Bolting on entities with adjacent viable technologies
  • Exit of markets or areas where activities are sub-scale or undifferentiated

2018 was largely similar to 2017 in terms of transaction activity.

In 2018, we saw 218 deals announced in the oilfield services sector globally, down by 7% from 234 in 2017 and approximately half the number of deals pre-crisis.

Deal value (US$21b) was down by 11% from US$24b in 2017. This decrease was due to the limited number of large transactions above US$1b (only 3 in 2018) and the continued absence of transformational transactions (above US$10b).

Given that cost efficiencies are still high on the agenda, a large volume of M&A activity has been driven by the need to achieve economies of scale through the creation of more dominant companies with greater scale and a broader portfolio of assets.

2018 therefore saw the combination of complementary asset-heavy companies in various sectors. We expect this trend to continue in 2019, with well-capitalized companies and investors engaging in more consolidation activity and/or acquiring assets out of administration.  

The oil and gas industry is one of the world’s most advanced users of technologies. However, to date, these technologies have been primarily focused on improving time to first oil and the effectiveness of hydrocarbon extraction, rather than operational performance and end-to-end integration.

The industry also collects massive volumes of highly specialized, siloed data. Significant opportunities exist to enhance data transparency and enterprise understanding to drive better decision-making and operating performance.

The past few years have seen a number of transactions driven by the acquisition of technology and the integration of digital data, and we expect these acquisitions to continue to be on the wish list of oilfield services companies looking to differentiate in 2019. While mostly small-sized transactions, these acquisitions could form a strong basis for operational outperformance and contribute to an increase in market share for the players involved.

The majority of oilfield services companies are working to streamline their offerings with data-enhanced processes, increasing flows, shortening process times and ultimately increasing efficiencies. This trend will continue in the years to come.

As in 2017, several special-purpose acquisition companies (SPACs) and financial sponsors deployed funds to the energy sector in 2018. With oil prices stabilizing and the market starting to recover, we should expect growing activity from SPACs and financial investors.

Financial stress was a key driver of M&A activity in 2017, specifically on the highly fragmented end of the market focused on serving non-complex oil and gas development projects or providing relatively commoditized products and services.

This trend was less prevalent in 2018, especially at the top end of the market, but still existed and is expected to continue in 2019.


Global oil and gas transactions trends highlight how portfolios are evolving to balance the present and the future.

About this article


Andy Brogan

EY Global Oil & Gas Leader

Oil & Gas sector leader, speaker and industry advocate, optimist, music addict and avid traveler.