Oil and gas M&A to remain resilient despite 2014 downturn

LONDON, Feb. 2, 2015 /PRNewswire/ -- Global oil and gas deal value increased by 69% in 2014 while deal volume continued its decline amidst rising volatility, according to EY's Global oil and gas transactions review 2014. Commodity price uncertainty will continue to influence transaction decisions in the year ahead as companies seek financial resilience.

After more than three years of relatively strong and fairly stable oil prices, weakening market fundamentals in the second half of 2014 finally outweighed geopolitical uncertainty, causing oil prices to decline by more than 50% and transaction activity to slow by year-end.  

The review highlights how 2014 was a notable year for oil and gas transactions despite a 20% drop in oil and gas deal volume to 1,885 from 2,367 in 2013. Total global deal value grew by more than 69% from 2013 to US$443b — well above the most-recent peak in 2012 of US$374b.

A similar story unfolded in each oil and gas segment. Deal value increased in upstream by 21%, downstream by 88%, midstream by 115% and oilfield services by an overwhelming 242%. Meanwhile, deal volume fell for each segment, except downstream.

Andy Brogan, EY's Global Oil & Gas Transaction Advisory Services Leader, says: "A number of transaction trends were evident in 2014, including bigger deals, less acquisition spend by national oil companies (NOCs), continued interest in US unconventional assets and expansion of private equity interest. Looking ahead, we expect to see some disruption from recent oil price volatility but for strength to return to the oil and gas M&A market as the year goes on and companies grapple with increased cost and margin pressures."

Upstream activity

Upstream transactions continued to dominate the global transaction landscape, accounting for almost three-quarters of the total global deal volume despite a 22% decline year-over-year. Meanwhile, upstream share of total deal value dropped below 50% for the first time in 2014 following a surge in non-upstream deal activity. Deal value did, however, grow by 21%.

Activity in the sector was driven largely by US consolidation and global megadeals. Sixty-five percent of the total value of global upstream transactions (US$120b) was attributable to 50 deals greater than US$1b in value.

Brogan says: "Companies are increasingly selective when it comes to transactions. Right now the focus is on portfolio optimization rather than just acquiring reserves or production. NOC acquisitions, in particular, dropped to a five-year low as companies focused on projects secured in previous years. Upstream transactions will center more around companies with strong balance sheets pursuing assets from those adjusting their portfolio to take account of new price levels."

Downstream activity

Downstream transaction activity recorded its strongest deal volumes and aggregate volume in two years with a 16% increase over 2013. It is the only oil and gas segment to record deal volume growth in 2014. Total disclosed deal value also grew by 88% year-over-year to US$25.1b.

The US accounted for the largest number of downstream transactions — approximately 56% — while Asia (including Australia) and Europe accounted for about 16% and 18% of total share respectively. While European activity fell 30% in the wake of continued economic uncertainty and supply/demand imbalances in 2014, the downstream segment shows no signs of slowing.

Brogan says: "Over 70% of downstream transactions in 2014 involved storage terminals in the US, and that figure could be on the rise if the country begins exporting crude oil. Given current oil price dynamics, we expect to see competition between oil and gas companies, independent storage operators, oil traders and infrastructure funds increase in the hunt for the right asset."

Midstream activity

The number of midstream transactions dropped off in 2014, but disclosed value was up sharply. With 102 announced deals in 2014, activity was down by more than 23%. Deal value, however, more than doubled to US$161b as a result of several large transactions.

The US and Canada dominated the playing field for both value and volume, accounting for more than 78% of all midstream deals and about 94% of the global midstream disclosed value. Deal activity involving pipelines accounted for the largest portion of midstream activity.  

With the unconventional resource boom in the US, attention to infrastructure investment is at an all-time high, with substantial new pipeline, processing and storage capacity being built. The midstream segment is also experiencing increasing consolidation as more companies pursue the advantages of Master Limited Partnership (MLP) arrangements.

Oilfield services

Despite a decline in deal volume year-over-year, oilfield services (OFS) deal value increased by an overwhelming 242% to US$72b in 2014 as a result of several large transactions — including the megadeal announced by Halliburton in November 2014. Excluding the Halliburton/Baker Hughes transaction, deal value remains at an impressive 62% increase over 2013.

Brogan says: "Over the next year, we expect the transaction trend of consolidation to continue in the OFS segment as companies try to capitalize on scale, improve operational efficiency and cost bases that have been hit hard by inflation and commodity price uncertainty."

Outlook for 2015

Brogan says: "Oil and gas companies around the world are grappling with how to generate returns and improve costs in the current environment of falling oil prices. The price of oil may dip further in the absence of short-term changes to the global oil balance, but we expect the market to strengthen and transaction activity to increase by the latter half of 2015. Improved prices won't be enough to sustain success. Managing the structural shift underway in today's oil and gas sector requires financial, operational and portfolio resilience."

Notes to Editors

About EY
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.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

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 10,000 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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