By Irina Slav
The oil industry expects more mergers and acquisitions in the 12 months ahead, which is a marked difference from just a year ago when everyone in oil was extra cautious and money was tight. This is the main outtake from EY’s latest edition of the Global Capital Confidence Barometer for the oil and gas industry.
The consultancy found an overwhelming number of industry executives are very optimistic about consolidation: 9 out of 10 expected more mergers and acquisitions in the next 12 months, and 74 percent expected their own company’s M&A deals in the pipeline to grow in the period. That’s despite challenges such as market volatility and inflationary pressures, which were cited as the biggest risks to their investment plans—by 40 percent and 49 percent of survey respondents, respectively.
The EY reports echoes a forecast that Wood Mackenzie made at the start of this year when the firm said it expected M&A activity to pick up as there is now more cash in the oil and gas industry thanks to recovering prices, and portfolio optimization has shaped up to be the top priority in a recovering industry.
EY’s survey also highlighted the importance of portfolio optimization. Some 60 percent of the latest survey respondents said this was their top priority, and 50 percent said their companies reviewed their portfolios much more frequently than before, as frequently as every six months.
Disposing of non-profitable assets and optimizing the ones that do bring in cash has become a must for oil and gas as, according to Wood Mac, “The downturn has reminded the industry of the need to make capital work, and the futility of retaining unproductive or non-core assets.”
Additional factors that Wood Mac said in January will support a growing M&A market, notably in the United States, were President Trump’s tax regime overhaul and the fragmented nature of the shale oil and gas industry that makes it the perfect candidate for consolidation.
Yet not everyone shares the optimism. The chairman of energy investment banking at Jefferies, Ralph Eads, told Bloomberg in March he expected another slump in mergers and acquisitions this year, after last year oil and gas M&As fell in value to US$74 billion from US$96 billion in 2016.
Eads is a marked skeptic, basing his skepticism on shareholders’ dissatisfaction with oil companies’ focus on growth at the expense of returns. “Investors are really saying to these companies, ‘Hey you guys have been buying assets and accumulating acreage and stuff for the last decade; where are the returns?”’ he told Bloomberg.
Most acquisition deals Eads expects to see this year will be for individual assets, with mergers a rarity, especially in the shale patch. Right now, he said, drillers in the patch are finding it hard to drill new wells both on budget and on time. Mergers would only aggravate this problem. So, the most common type of acquisitions he expects would be large players buying out smaller ones in the Permian, but there will by no means be a wave of M&As in the sector.
Indeed, the EY survey does not address the value of M&As executives expect. Wood Mac also does not expect any huge deals being closed this year. It looks like divestment of underperforming assets will be what a lot of M&A deals will be about, as suggested by the EY survey: more than half of respondents said they were looking to divest underperforming assets rather than buying other companies.