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-- M&A down by 21% in value to US$337b and by 23% in volume to just under 1400 deals as larger transactions and downstream activity decline
-- Uncertainty over future oil and gas price trajectories lead to deals being deferred
-- Projections of flat or declining oil price and cost escalation, 2014 is likely to remain challenging
LONDON, Jan. 21, 2014 /PRNewswire/ -- Oil and gas M&A activity was significantly lower in 2013 in value and volume according to EY's Global oil and gas transactions review. The impact of supply side trends on restricting activity are also likely to continue over the next 12 months.
The review highlights there was a 21% decline in M&A value to US$337b, significantly lower than the record high of US$423b in 2012. The total number of oil and gas transactions, was also down sharply in 2013 - dropping from just over 1,800 transactions in 2012 to just under 1,400 transactions in 2013 - a decline of 23%. In 2013, there was a reduced willingness to commit to larger transactions. In 2012, 98 oil and gas transactions exceeded US$1b in value, compared with just 70 in 2013. In 2012, there were four "megadeals" with reported values over US$10b, but in 2013, there were only three such deals. In 2012, the combined value of all deals larger than US$1b topped US$309b, while in 2013, deals US$1 billion or greater totaled only US$241b.
Andy Brogan, EY's Global Oil and Gas Transaction Advisory Services Leader comments, "The oil and gas sector remains one of the most resilient sectors globally, with an average of four M&A deals per day. It has coped reasonably well with an uncertain economic environment for much of the year but has also been impacted by industry specific supply side issues."
Normal M&A drivers of portfolio and capital optimization helped upstream remain the most active segment, with US$237b in announced transaction value from 1,009 deals in 2013, accounting for about 70% of the global totals of both value and number of deals. North America continued to be the dominant region for upstream activity, generating approximately 30% of upstream transaction value and about 53% of the global deal volume. Nonetheless, this was a slight decline in the region's relative importance, with upstream deal activity in the US dropping as shale gas activity declined, largely a victim of its own success in previous years.
Brogan comments, "As well as shale deals declining, 2013 also saw uncertainty over the future oil and gas price trajectories increase in prominence which probably acted to defer a significant number of transactions. As a result, the inventory of assets either officially or unofficially on the market has reached historically high levels."
Transaction values and deal volumes in the downstream segment were down sharply in 2013, with reported deal values totaling only about US$14b and only 109 deals. In comparison, segment values totaled US$47b in 2012, with almost 200 deals. Ownership change in retail and refining in mature markets continued, stemming from ongoing portfolio rebalance and capital allocation reviews. Growing oil demand and refining capacity, particularly in Asian markets, supported a brighter picture for other markets, albeit with relatively low transaction levels.
Brogan continues: "Storage facilities that deliver global connectivity and trading potential continue to attract acquirers, with conversion of refining facilities also being considered, particularly in markets with stagnant or declining oil demand (such as in the US or Europe) and surplus relatively-inefficient refining capacity. However, capacity management has come increasingly to the fore in this market towards the end of 2013."
In contrast to the other segments, activity strengthened in the midstream segment in 2013, with reported deal values rising to more than US$70b (compared with US$60b in 2012, but well below the US$88b seen in 2011), although the number of deals declined from 104 in 2012 to 90 in 2013. With its vibrant and tax-advantaged Master Limited Partnership (MLP) sub-segment that relies on acquisition activity to grow, North America accounted for about 71% of all midstream transaction activity and reported deal values.
As Brogan explains, "We do, however, expect midstream activity levels to continue to increase outside of North America as infrastructure ownership further disaggregates from upstream assets, driven by capital allocation and regulatory factors. Indeed, we expect the deployment of infrastructure fund capital into the parts of the sector where stable returns can be structured to be a global trend for as long as monetary policy restricts the availability of alternative low risk assets."
After a strong year in 2012, activity in the oilfield services (OFS) segment struggled in 2013, with reported deal values declining by almost 50% to about US$15b, and the number of deals falling by almost 25% to 185. While activity relating to onshore and unconventional suppliers remained muted, driven by the tough operating environment in those parts of the industry, service companies supplying the offshore sector remained in demand.
Brogan explains, "Access to new technologies, particularly around deepwater applications, has enabled expansion into hard-to-access growth markets, and has fueled trade player activity. This is supported by the more benign competitive environment for internationally credible offshore and deepwater applications. Additionally, financial investors demonstrated a continuing appetite for the OFS segment, playing a role in several of the segment's largest deals."
Looking forward to 2014
The review highlights three significant themes to look for in terms of driving M&A activity in 2014 as Brogan explains:
"Capital discipline - 2013 has seen the International Oil Companies (IOC) in particular come under increasing pressure from their equity investors to deliver. With the cost of the mega projects in which the IOC's specialize under severe upwards pressure this will continue to drive portfolio optimization as they focus their portfolios more ruthlessly than ever before on the areas where they can demonstrate competitive advantage. For some, this may mean aggressive divestment campaigns, for others more innovative financial structuring solutions."
"The onward march of the national oil companies (NOCs) - one of the interesting features of 2013 is that outbound NOC investment has continued. While some particularly active outbound investors have been less active as they digest their previous acquisitions, others have come to prominence. The overall rise in prominence of NOCs and the continued growth in NOC to NOC partnerships and relationships will continue to drive the shape of the industry."
"Coming to terms with unconventionals - it is still difficult to fully comprehend the massive impact unconventional technology is having on the industry. From a breaking of the previous decade's consensus on oil price trajectory, to the ongoing debate about the viability of shale gas basins in different parts of the world, to the potential restructuring of the entire global LNG market, its impact is everywhere. As always with new technologies each wave of innovation will bring with it winners, losers and M&A activity."
Notes to Editors
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
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This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.
About EY's Global Oil & Gas Center
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 Center supports a global network of more than 9,600 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors.
The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. For more information, please visit ey.com/oilandgas.
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