Oil & gas M&A outlook optimistic despite five-year low deal volume, says new report

BY Fraser Tennant

An optimistic 2018 is the outlook for mergers and acquisitions (M&A) in the oil & gas sector, despite deal volume last year being at a five-year low, according to a new EY report.

In  its ‘Global oil and gas transaction review 2017’, EY reveals that global oil and gas deal volume hit a five-year low in 2017, with total global transaction value falling to $343bn from $390bn in 2016. Furthermore, while 2017 saw a 21 percent increase in megadeals (deals of more than $1bn), a lack of blockbuster deals (deals of more than $50bn), meant overall deal value fell.

In terms of upstream transactions, deal value climbed to $172bn in 2017, characterised by a strong first quarter and outpacing average deal value across the rest of the year by more than 82 percent. North America dominated upstream activity, with deal value up 19 percent to $94bn. Last year also saw Europe’s best performance in more than five years at $27bn.

Furthermore, 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.

“Risk sensitivity and a continued focus on internal performance improvement may have delayed the uptick in deal volume we expected in 2017,” said Andy Brogan, EY global oil & gas transactions leader. “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.”

The report also states that midstream deal volume was up 14 percent in 2017, but deal value contracted to $84bn, down 43 percent relative to 2016. Turning to downstream transactions, deal value declined 12 percent to $59bn in 2017, with the number of transactions also dropping 16 percent compared with 2016. That said, deal values in 2017 were more than $14bn higher than the average recorded over the last five years. The US led other regions in both deal volume and value, with 43 transactions totalling $32bn.

“A lack of blockbuster deals in 2017 highlights the industry’s sense of caution in the post-downturn era,” added Mr Brogan. “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 optimisation, increased access to capital markets and value chain integration,” concluded Mr Brogan.

Report: Global oil and gas transactions review 2017

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