Oil and gas M&A outlook positive despite deal volume at five-year low

LONDON, Feb. 14, 2018 /PRNewswire/ -- Global oil and gas deal volume hit a five-year low in 2017, and total global transaction value fell to US$343b from US$390b in 2016. This is according to the EY Global oil and gas transaction review 2017, which also found that while 2017 saw a 21% increase in megadeals (deals of more than US$1b), a lack of blockbuster deals (deals of more than US$50b) meant overall deal value fell. However, the 2018 outlook for mergers and acquisitions (M&A) remains optimistic, with upstream deal value increasing 30% year-on-year.

Andy Brogan, EY Global Oil & Gas Transactions Leader, says:

"Risk sensitivity and a continued focus on internal performance improvement may have delayed the uptick in deal volume we expected in 2017. But the need to demonstrate appropriate returns is now pushing companies to reposition their portfolios and seek economies of scale, which in turn we anticipate will underpin more M&A activity in 2018."

Upstream deal value climbed to US$172b, characterized by a strong first quarter and outpacing average deal value across the rest of the year by more than 82%. North America dominated upstream activity, with deal value up 19% to US$94b in 2017. Last year also saw Europe's best performance in more than five years at US$27b (excluding 2015's Shell-BG deal).

Increasing activity among private equity players and the adoption of more innovative transaction structures are expected to drive upstream M&A in 2018, as joint ventures between independents become increasingly common and healthier balance sheets encourage growth the report finds.

Midstream deal volume was up 14% in 2017, but deal value contracted to US$84b – down 43% relative to 2016. And excluding blockbuster deals, total valuations continued a four-year downward trend. Meanwhile, the trend toward large North American transactions continued, accounting for nearly 90% of the top 20 deals. As commodity prices strengthen, the report anticipates a stronger midstream deal market in 2018, amid investment in North American shale basins and easing political tensions in the Middle East.

Downstream deal value declined 12% to US$59b in 2017, with the number of transactions also dropping 16% compared with 2016. This reflects less transaction activity and no movement in average deal size. However, deal values in 2017 were more than US$14b higher than the average recorded over the last five years. The US led other regions in both deal volume and value, with 43 transactions totaling US$32b.

This year is expected to see a continued focus on transactions in the downstream, as companies look to further balance portfolios across the value chain and seek growth opportunities.

Despite unreliable demand and aggressive price competition, oilfield services (OFS) operators increasingly focused on returns in 2017, yielding 215 deals – up 13% on 2016. Yet, at US$28b, deal value was down by 35% year-on-year, owing to the absence of large transformational deals. An increase in upstream capex spending and the improving oil price environment is expected to see OFS M&A activity continue to strengthen into 2018.

Brogan says: "A lack of blockbuster deals in 2017 highlights the industry's sense of caution in the post-downturn era. But buyer and seller expectations have been narrowing and a robust pipeline of actionable M&A opportunities is now available, underpinned by an increase in the oil price, decreasing valuation gaps and improving market sentiment. We expect these trends to continue to prevail in 2018, with M&A activity flowing from portfolio optimization, increased access to capital markets and value chain integration."

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About the EY Global oil and gas transactions review 2017

The EY Global oil and gas transaction review 2017 looks at significant trends in oil and gas deal activity throughout 2016 and the outlook for transactions in 2018. 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 Services.

For more information, please visit ey.com/oilandgas/transactions.

Michael Curtis
EY Global Media Relations
+44 (0)207 980 0454
[email protected]

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