Rising oil prices boost M&A confidence in oil and gas

Oil and gas sector appetite for mergers and acquisitions soars to a nine-year high for selective, strategic deals.

The majority (85%) of oil and gas executives see the state of the economy within their sector improving. Strong growth earnings in 2018, in the US especially, further supports their positive outlook for 2019. Oil prices continue to rise (notwithstanding the last quarter of 2018), and executives are seeing the payoff on cost and capital efficiency measures initiated during the oil price downturn. 85% of oil and gas executives are anticipating between 6% and 15% revenue growth in 2019, according to the EY Global Capital Confidence Barometer.

Despite their optimism, executives have an eye on the downside risks

Despite their optimism, the interconnected nature of the modern global economy presents many downside risks that oil and gas executives appear to be keeping in mind. Nearly one-third of executives cite slowing economic activity as a key risk, given its impact on the demand for oil and gas. Oil and gas executives are also sensitive to geopolitical risks, including production losses from Iran and Venezuela, as well as production cuts by OPEC.

Shareholder activism and convergence drive regular portfolio review

More than 90% of oil and gas executives have advised that the re-emergence of shareholder activism in the oil and gas sector is compelling companies to take specific actions to reshape their portfolio. Over 60% of companies are being asked to divest assets or reconfigure their portfolio. Advancements in technology are blurring sector boundaries, and oil and gas executives see convergence from both power and utilities and mining and metals. As a result, there is increased focus on the continuous review of portfolios, with more than three-quarters of the companies surveyed reviewing their portfolio at least once every six months.   

Robust M&A appetite suggests executives are filtering out the noise

That said, oil and gas executives appear to be largely filtering out the geopolitical and regulatory noise as their appetite for M&A soars to a nine-year high. More than two-thirds of oil and gas executives (67%) expect to pursue M&A in the next 12 months, versus 59% of global executives across all industries.

At the same time, oil and gas executives are signaling that they will be more selective in their choice of M&A targets and will carefully weigh the advantages and risks before finalizing the deals and committing their capital. This is supported by a slight dip in pipeline expectations from a year ago.

Oil and gas executives in the previous three years have targeted bottom-line synergies and access to new technologies as areas where they have derived the most value from completed deals. As they look ahead, oil and gas executives indicate that their focus will shift to unlocking new sources of growth through market expansion and top-line synergies.

While organic growth will remain the primary focus, executives will continue to pursue strategic M&A in the months ahead

As oil and gas executives survey the landscape in the months ahead, we expect they will continue to pursue growth opportunities by freeing up working capital and optimizing cash flow to boost liquidity, and by strategically pursuing deals that offer the right valuation and maximum return on investment.