Energy faces uncertain future as megatrends transform oil & gas sector

BY Fraser Tennant

Industry megatrends, such as historically low commodity prices, are transforming the oil & gas sector with a challenging future the likely outcome, according to PwC’s New Energy Futures report published this week.

Recognising the uncertainty clouding the sector’s future, the report proposes a framework which evaluates four potential future scenarios that could help companies successfully navigate an increasingly complex and volatile global market over the next 5 to 15 years.

The four are: (i)  the oil and gas sector evolves along current lines with limited government intervention; (ii) demand from energy consumers (retail & commercial) for cleaner energy drives the transition towards a low carbon; (iii) governments drive increased energy efficiency, expansion of renewable energy demand and accelerated development of disruptive technologies; and (iv) supply constraints are triggered through direct government action, such as implementing carbon legislation or withholding licences (e.g,. Shale, Arctic) or geopolitical disruption.

“Global demand for affordable, reliable energy will continue to grow for the foreseeable future, but there is a new longer-term backdrop, as the world transitions to a low carbon system,” said Viren Doshi, PwC’s Strategy& oil and gas leader. “Momentum to replace fossil fuels with cleaner energy sources is building, and oil and gas companies need to consider their futures in this context."

The report also recommends that companies across the oil & gas chain: (i) have a clear strategy and alignment with portfolio, decision making processes and capabilities; (ii) have an ability to be agile and resilient in uncertain times; (iii) have an innovative response to disruptive change using existing assets as well as technology, knowledge and capabilities; (iv) have a readiness to form alliances and collaborate across the supply chain; and (v) safeguard the social licence to operate by sustaining the trust and support of investors and wider stakeholders through increased transparency.

Jan-Willem Velthuijsen, PwC’s chief economist in Europe, believes that the recommendations will allow companies to “reassess their current strategy and plans, with implications for the operating model, partnering strategy, resourcing and technical capabilities and other areas".

Despite all the uncertainty and prediction of a challenging future, Mr Doshi is in no doubt as to oil and gas sector’s ability to innovate and adapt to a rapidly changing world: “Time and again, successful operators have demonstrated the ability to respond to challenges by taking a long term view, innovating, adapting and gauging major trends as they define medium-long term investment plans.

“We are convinced that they can do so again."

M&A deals drop in oil & gas space

BY Richard Summerfield

Strong headwinds in the oil & gas markets and wider global economic uncertainty have made a significant impact on deal making over the last two years. Indeed, mergers and acquisitions activity in the US oil & gas industry plummeted to its lowest fourth quarter period in five years, according to a new report from PwC.

PwC’s Q4 Oil & Gas Deals Analysis noted that Q4 2015 saw 42 deals in the oil & gas space with values of $50m and above. Those deals recorded in the final quarter of last year were worth $31.6bn. The previous year saw 70 deals worth $103.4bn during the same period. 2015 saw a 69 percent decline in total deal value year on year.

Doug Meier, PwC’s US Oil & Gas Sector Deals Leader, said, “Accelerating declines in oil and gas prices coupled with the closing of the capital markets for oil and gas companies during the second half of 2015 drove management teams to focus on cash preservation. As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models. This internal focus resulted in a steady decline in oil and gas deal activity leading to the lowest fourth quarter in five years, a period that is typically strong for oil and gas deals.

"While the headlines appear depressing, deal-making opportunities exist for companies with dry powder and who are willing to use their equity as currency for doing deals. Looking at the subsectors, midstream companies, including MLPs, were hit with a devastating left-right combination of dramatically lower stock (unit) prices and closed capital markets, resulting in a precipitous decline in the fourth quarter midstream deal activity," he added.

The difficulties seen in deal making in the US in Q4 were experienced the world over last year, according to PwC’s data. In 2015, worldwide power and renewables deal value reached $199bn, a decline of 16 percent from the $236.2bn recorded in 2014. However, in spite of this decline, renewable activity boomed in 2015, nearly doubling year on year from $28.3bn in 2014 to $55.3bn in 2015. Renewables’ share of deal value rose from12 percent in 2014 to 28 percent in 2015.

Europe and the Asia-Pacific region were the most popular locations in terms of number, by both bidder and target in 2015, with 313 and 318 deals in each region respectively. The US led the field on total deal value.

Looking ahead, PwC expects Europe to be a strong focus of activity in 2016 as the region continues to provide the highest volume of global power and renewable deal activity, although deal numbers and value dipped in 2015.

Report: PwC’s Q4 Oil & Gas Deals Analysis

Financial services firms report strong business growth but sober optimism in new survey

BY Fraser Tennant

Financial services firms are reporting strong growth in business volumes and improving profitability, according to the latest CBI/PwC Financial Services Survey published this week.

The quarterly survey, which reflects the views of 100 financial services firms in the three months to December 2015, reveals that the overall level of business remained “above normal” – despite the fact that business with overseas customers fell to its lowest level in three years.

The survey also found that although there was a marked increase in optimism in the financial services sector in the first half of 2015, this had risen only slightly by the year’s end due to the impact of strong competition on incomes (though tight cost control has helped to support a growth in profitability).

Key findings in the CBI/PwC survey include: (i) 45 percent of financial services firms stated that business volumes were up, while 22 percent said they were down; (ii) 30 percent of firms expected business volumes to increase, while 20 percent said they expect to see a fall; (iii) 14 percent of financial services firms indicated they felt more optimistic about the overall business situation compared with three months ago, while 8 percent said they felt less optimistic; and (iv) 29 percent of respondents confirmed that, in volume terms, their level of business was above normal, while 18 percent stated that it was below normal.

Despite strong growth in profitability driven by easing cost pressures and increasing business volumes, Rain Newton-Smith, CBI Director for Economics, is aware of the downside risks from developments overseas. She said: “The global economic outlook remains uncertain while China rebalances, which is having knock-on effects on emerging markets, amidst continued unrest in the Middle East.

“While investment intentions remain robust in IT, and marketing spend is set to expand as firms seek new customers, elsewhere companies are curtailing their capital spending due to poor returns.”

Over the next 12 months, the survey forecasts that financial firms expect to see weaker growth in business volumes, in addition to flat income and rising costs. In the meantime, employment prospects remain mixed, with banks in particular reporting a fall in employment.

“It’s clear that optimism is muted across the whole (financial services) sector and each sub-sector has its own challenges," commented Kevin Burrowes, UK financial services leader at PwC. “Against this backdrop, the growing spectre of cyber-crime looms large and the threat of major attacks continues to stalk the entire financial services industry.”

Report: CBI/PwC Financial Services Survey December 2015

Biopharma M&A expansion to continue in 2016 claims new report

BY Fraser Tennant

Following a record-breaking 2015 which saw deals total $300bn, mergers and acquisitions (M&A) activity within the biopharmaceutical industry is set to continue at a “brisk” pace in 2016, according to the new EY ‘Firepower Index and Growth Gap Report’ published this week.

The EY Index, which measures the ability of biopharma companies to fund M&A transactions based on the strength of their balance sheets and their market capitalisation, reveals that the drivers of biopharma M&A last year included payer consolidation, rising healthcare costs and the intensification of companies’ growth imperatives throughout the industry.  

Among the key findings highlighted in the Index are that: (i) deal activity in early 2015 was driven by specialty pharma companies with a majority of deals by total valuation in the specialty or generics sector (big pharma grabbed the limelight later in 2015 while biotech experienced more modest deals); (ii) big pharma’s aggregate growth gap – the revenue shortfall below global biopharmaceutical sales growth – remained stuck at near $100bn due in part to foreign exchange headwinds; and (iii) specialty pharma’s firepower, has decreased by nearly 50 percent following a recent series of debt-fuelled acquisitions and falling equity valuations.

“While we can’t predict more large transformational deals over $100bn in 2016, we do expect a continued brisk pace for acquisitions and a continuation of the robust divestiture environment, as companies seek to focus on and gain scale in their chosen therapeutic areas,” said Glen Giovannetti, EY’s Global Life Sciences leader. “Three times as many companies now possess at least $3bn in firepower than a year ago, meaning more competition for targets as well as a longer list of potential acquirers for divestitures.”

However, while the Index makes it very clear that biopharma companies continue to benefit from an era of increased drug approvals and healthy pipelines, there are a number of challenges and considerations likely to drive M&A in 2016. These include a renewed focus on value-based drug pricing, staunch competition across key therapeutic battlegrounds and consolidated payer clout, which may exacerbate existing growth gaps and result in a continued feverish deal environment.

“These pressures may make the lofty heights of $200bn in annual M&A the new normal for the foreseeable future,” concluded Jeffrey Greene, EY’s Global Life Sciences Transaction Advisory Services leader.

Report: EY’s Firepower Index and Growth Gap Report 2016

Britain’s tech sector boom

BY Richard Summerfield               

The tech sector has enjoyed a meteoric rise in recent years. Developments such as the Internet of Things, Big Data and the Cloud have become key features of the modern corporate landscape.

In the UK, the tech sector is booming. Over the last five years 45,000 new technology firms have been created in the UK, equivalent to one new firm ever hour, according to a new report from KPMG. Though London and the South East have remained the most popular locations for tech sector development, surprisingly a large portion of the growth has been spread throughout the UK. Sixty-three local authorities achieved double digit growth in the number of tech enterprises over the last 12 months. Fifteen of the fastest growing local authorities were found within the capital, including Hackney, Newham, Islington, Camden, Bexley, Havering, Waltham Forest, and Barking and Dagenham.

The past six years have seen steady growth in job creation within the UK’s technology space. That said, 2015 saw a slowdown, hitting the lowest level in two and a half years in Q3 2015, with profitability falling for the first time since Q1 2013. Nevertheless, the long-term trend is positive.

 “We can therefore be justly proud of the Tech scene and be optimistic for the future of what must be a key sector for the UK,” said Tudor Aw, KPMG’s Technology Sector Head. “It is important however, that more be done to help ensure the continued growth of the sector, particularly around STEM subject education, regulatory and fiscal conditions, and last but not least, profile within the media to highlight the importance and success of the sector."

The UK’s primary tech cluster remains in Reading. More than one-in-five enterprises (22 percent) based there are tech sector firms, which is almost three times the national average of 8 percent. Throughout the last 12 months, Warwick has seen the fastest increase at 28 percent, followed by Hackney at 25 percent increase and Rotherham at 21 percent.

Clusters of tech sector specialisation seem to be forming around the country. The South Cambridgeshire cluster, for example, is notable for biotech ; while Nuneaton & Bedworth is renowned for automotive-related tech. The City of London is, unsurprisingly, the focal point for FinTech development.

Optimism surrounding the industry remains high. Fifty-four percent of respondents to KPMG’s survey anticipate a rise in business activity over the next 12 months, while only 7 percent predict a decline.

Report: KPMG Tech Monitor UK