Following years of volatility the global economy appears to have stabilised of late. But despite the recovery gaining pace, optimism in the oil and gas sector has remained low among executives. According to EY’s 10th bi-annual oil and gas capital confidence barometer, the previously buoyant mood of senior oil and gas executives about the global economy and the market itself has all but vanished.
As EY notes in the report, even as Europe begins the difficult task of emerging from its long recession, growth across the continent remains weak. The lacklustre nature of the recovery is particularly evident in southern Europe where a number of significant structural issues remain. In northern Europe, as well as a number of other developed nations worldwide, the recovery seems more robust. Consumer and business confidence is clearly on the rise across the mature economies, according to EY.
However, despite the uptick in both global growth and confidence, EY’s report, which surveys 1600 senior executive in more than 54 countries, including 145 oil and gas executives, notes that confidence among oil and gas executives is at its lowest level ever recorded. Andy Brogan, EY’s global leader for oil and gas transaction advisory services, said “The barometer shows a new consensus in oil and gas prices and relentless pressure on capital efficiency is driving a greater emphasis on optimisation versus growth. A conservative view on oil and gas pricing, combined with pressure to deliver capital returns has led to the industry adopting a slightly more cautious approach.”
Fifty-four percent of respondents to EY’s survey, which was taken in April and released in early May, felt optimistic that the global economy is improving and will continue to improve throughout 2014; this is down from 71 percent of those surveyed in October 2013. Although there has been an increase in the number of companies which view the global economy as stable, up from 18 percent in 2013 to 37 percent, oil and gas companies are slightly less optimistic about their prospects. Furthermore, confidence in firms’ ability to create jobs in the oil and gas sector also fell to 37 percent in 2014 from 54 percent last year.
Continuing the growing trend of increasing shareholder activism, respondents to the EY survey noted that shareholder concerns are driving boardroom agendas. Ninety-two percent of respondents in the oil and gas sector stated that issues raised by shareholders have shaped boardroom strategy recently. In light of the increased agitation from shareholders, many respondents noted that cost-cutting exercises and efficiencies are no longer just operational issues – they have become strategic imperatives. Accordingly, the survey shows that 40 percent of respondents are focused on cost reduction and operating efficiency. This figure represents a significant increase from the 28 percent of respondents in October 2013. As a result of this redrawn focus on cost cutting and operational efficiencies, the wider focus on growth in the sector has diminished somewhat. Just 39 percent of respondents now see growth as their primary focus – by contrast 66 percent of those surveyed saw growth as their primary concern in October 2013.
Growth and M&A
Fifty-six percent of all oil and gas respondents said they expect acquisitions to make up 25 percent or less of their total planned growth for the current fiscal year. Notably, less than 10 percent of respondents expect acquisitions to account for more than 50 percent of planned growth.
Thirty percent of respondents to the EY survey expect their firms to actively pursue acquisitions over the next 12 months – a 9 percent decrease from the 39 percent recorded in October. However, despite the relatively low levels of M&A activity witnessed and the low expectations of deal activity, the oil and gas sector generally remains broadly optimistic that deal activity will increase going forward. Fifty-nine percent of respondents in the sector believe that volumes of M&A activity will improve modestly, at least. By comparison, expectations of the larger global sample of respondents were only slightly lower.
According to respondents, the recent reduction in M&A activity is more to do with deal values than volumes. Historical valuation differences between sellers and acquirers, in tandem with the general caution of the economic environment, have driven down activity in the past. However, the gaps between valuations appear to be narrowing, according to respondents. Mr Brogan notes that “The deal market in oil and gas is traditionally very resilient but we are in more of a buyers’ market now than we have been for some time. We expect the general note of caution to continue to deter some of the bigger deals but expect that deal volumes will remain reasonably robust. The continuing focus on emerging market activity appears to be here to stay.”
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