Industry distress to fuel oil and gas transaction activity as crude price dives

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  • Global oil and gas deal volume and value down 33% and 17% respectively year-on-year
  • Downstream outperforms sub-sectors with 57% deal value increase
  • Narrowing valuation gap brings buyers and sellers closer to deals

SINGAPORE, 29 March 2016 – More oil and gas companies are expected to succumb to stress in the sector, which will drive transactions in 2016, after global deal volume and value fell short of expectations in 2015, dropping by 33% and 17% respectively year-on-year.

EY’s Global oil and gas transactions review 2015 finds that deal volume was down in nearly all sub-sectors in 2015 compared to 2014, most notably in oilfield services (OFS), where deal activity decreased by almost 40% from 320 to 193, and in upstream where deal volume dropped from 1,467 in 2014 to 910 in 2015, a 38% decline.

Deal value was similarly depressed across most sub-sectors with OFS leading the pack with a 63% decline from 2014. Total value did, however, increase by 57% in the downstream sector following a number of sizable transactions involving refining assets in the US.

Andy Brogan, EY Global Oil & Gas Transaction Advisory Services Leader, says: “Declining crude prices coupled with an uncertain outlook challenged transactions in 2015. Now, with greater consensus around a ‘lower for longer’ outlook shrinking the valuation gap between buyers and sellers, we’ll likely see more deals come together this year. Companies that have shown resilience amid US$40 to US$50 per barrel of oil are beginning to face insurmountable distress as the price sinks below US$40. All signs point to a more opportunistic market for M&A activity.”

Portfolio optimization to continue

Upstream companies are pairing their ongoing focus on cost cutting with high grading their portfolios. This may lead to a consolidation of ownership around core assets as companies seek to increase control over their overall capital outlay and maximize opportunities to use their operational capability to deliver value. That consolidation will also cascade into the OFS sector.

Brogan says: “Excellence in operational and project execution remains essential not only to success but to survival in the global oil and gas sector. The traditional energy business model has been forced to flex to a new ‘resource abundant’ world.”

Mega-mergers and follow-on M&A activity

Consolidation, which began in 2014 with several megadeals, will continue this year with significant follow-on activity as merged companies are forced to sell businesses following regulatory pressures.

Brogan says: “Large-scale consolidation presents many challenges due to the complexity of businesses involved and anti-trust issues that arise. Megadeals are most likely to emerge in the upstream space with OFS companies following suit in order to meet new demands.”

Vertical integration

Vertical integration is also high on the agenda for OFS companies seeking to build full-service delivery capabilities to meet operators’ increasingly demanding price and delivery expectations. There’s an opportunity for equipment manufacturers, as well, to acquire suppliers and recover aspects of the value chain traditionally outsourced to low-cost regions like China and India.

Deployment of private capital

Renewed interest from a wide range of financial players, not only distressed funds but also private equity firms, family offices and infrastructure funds, have been increasingly active in the sector. Depressed oil prices will continue to unearth opportunities for these investors to expand their product offering and to diversify their activities in the market.


Notes to Editors

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About EY’s Global Oil & Gas Sector

The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively.

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About the report

EY’s Global oil and gas transaction review 2015 looks at significant trends in oil and gas deal activity over 2015 and the outlook for transactions in 2016. It considers the diverse dynamics in the upstream, downstream, midstream and oilfield services (OFS) segments, as well as the macro environment and regional trends, which can be found exclusively online. The report presents EY’s analysis of transaction data largely compiled by Derrick Petroleum. Throughout this report, disclosed or reported transaction values are expressed in US dollars.

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