Perspectives on Oil and Gas Transaction Activity in 2014

With an average of almost four transactions every day, oil and gas has remained one of the most active and resilient global sectors for M&A. While total oil and gas transaction activity was down in 2013 compared to 2012, oil and gas M&A has generally remained robust in the face of macro-economic headwinds. As we look forward to 2014, we see the M&A market being driven by the continuation of a number of trends observed in 2013, as well as by some new factors coming into play.

Some of the more significant trends are:

  • Capital discipline. Year 2013 has seen the IOC’s in particular come under increasing pressure from their equity investors to deliver better returns on capital and to return cash to their shareholders. 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 and losers, and consequently, M&A activity.
  • New forms of finance. The deployment of traditional infrastructure funds as well as other forms of private capital continues to grow as the industry gets more sophisticated at matching the returns in different parts of the value chain to the needs of different investor classes. The return of an old form of finance – one part of the M&A market that has suffered particularly in the last five years has been the small and mid-cap sectors as equity markets have been largely closed to these companies. With some buoyancy now coming into the IPO markets, the financing stream will enable a resumption of activity by these players.

Assessing the impact of these sometimes competing trends does involve a great deal of uncertainty. As we look back on the 2013 M&A market, one of the central features of the market was that it was a very well supplied M&A market that struggled with efficient price discovery. We do not see any reduction in the volume of assets coming to market this year, so the key to 2014 from an M&A perspective is a renewed consensus on asset pricing. This in turn relies on the return of some form of consensus on oil and gas price trajectories.

Last year we forecast continued resilience in the oil and gas M&A market, and many of the fundamentals remain unchanged. The decline in deal activity across 2013, therefore, raises some challenging questions about the outlook for deal activity in 2014. In particular, with many industry players projecting flat or declining oil pricing, and cost escalation and resource shortage increasingly impacting the sector, projects are coming under increased scrutiny and we would thus anticipate further portfolio review activity. A resumed consensus on exactly where oil and gas prices are going is probably the most single important factor in transaction volume growth.

In the upstream side of the industry, deal activity in 2013 may have been down on recent years, but the segment remains a highly active transactions market. Finance requirements will continue to be a major driver for upstream M&A, both at the junior end to farm-out liabilities, and at the larger end to fund sizeable development capital expenditure requirements. While North America will remain the core of the upstream M&A market, we expect increasing M&A activity in East and West Africa, CIS and in Latin America, as the emerging markets continue to develop. In addition, we expect to see more activity as the Arctic begins to open up, and as unconventional exploration/development activity expands outside North America.

In the downstream, refining margins were generally off slightly year-on-year in most markets, with US average margins continuing to be substantially higher than those in Europe and Asia. While refiners broadly kept utilization under control in 2013, oil demand worries, particularly in Europe, remain in the forefront, especially given the surge in new refining capacity coming out of the Middle East and Asia in the next few years, with much of that capacity being relatively complex. As a result of the looming capacity imbalance, combined with increasingly stringent environmental and product quality standards, we expect that there will be increasing pressures once again on the marginal European refiners as well on some of the less-competitive US refiners, potentially opening opportunities for transaction activity.

With the unconventional oil and gas boom in North America, attention to infrastructure investment has been at an all-time high, with substantial new pipeline, processing and storage capacity being built. We’ve also been seeing increasing consolidation, largely spurred on by the significant tax advantages for MLP structures. Total disclosed transaction value in the US midstream segment has averaged almost $45 billion per year over the last four years, and we expect interest and activity to remain high.

We also expect to see continuing focus on market positioning and capacity investment for the oilfield services industry, particularly for offshore exploration and production (both deep and ultra-deep), as well for unconventional development in North America, Australia, Latin America and China. Moreover, acquisition activity will also be driven by consolidations to capture scale of operations effects, for both asset-heavy and asset-light oilfield services companies.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.