EY: M&A market in the oil and gas sector recovers in 2014 after last year decline

With an average of almost four transactions every day, oil and gas has remained one of the most active and resilient global sectors for M&A. As a capital-intensive industry, the management of capital has remained integral to the agendas of the sector throughout the global downturn and recovery.

2014-02-21 13:45:40

While oil and gas M&A has remained robust in the face of macro-economic headwinds, 2013 saw the increasing impact of industry specific supply side trends which are likely to have an ongoing influence on M&A activity in the sector.

In 2013, the total disclosed or reported oil and gas transaction value was USD 337bn. This total was significantly lower (down 21 per cent) than the record high of USD423 billion posted in 2012. The total number of oil and gas transactions, including deals without reported deal values, was also down sharply in 2013-dropping from just over 1,800 transactions in 2012 to just under 1,400 transactions in 2013 -a decline of more than 23 per cent.

Notably in 2013, there was a reduced willingness to commit to larger transactions. In 2012, 98 oil and gas transactions exceededUSD1 billion in value, compared with just 70 in 2013. In 2012, there were four "megadeals" with reported values more than USD10 billion, but in 2013 there were only three such deals. In 2012, the combined value of all deals larger than USD1 billion topped USD309 billion, while in 2013, deals USD1 billion or greater totaled only USD 241 billion. Interestingly though, even with the sharp reduction in the absolute number of deals in 2013, the relative mix of deal sizes (i.e., in percentage terms) has remained essentially the same over the last four years

Europe represents a diverse market for oil and gas M&A. There is substantial regional activity across the upstream sector, and midstream and downstream assets. Many European deals have a broader, global angle with European stock markets, particularly in the UK, being home to a wide range of international players and the established oil field services industry in Europe also boasting many companies with a proven global footprint.

2013 saw European oil and gas transaction volumes decline by 22% to 162 from the 208 deals recorded in 2012. The total reported value of oil and gas transactions also declined to USD 20.7 billion from USD30.3 billion in 2012, a decline of almost 32 per cent, although only 59 transactions reported deal values.

Accordingly, the average reported deal value in 2013 of USD351 million was an increase on 2012's average of USD 330 million, reflecting the impact of a number of large, strategic deals across the sector in Europe.

All segments of the European oil and gas market experienced a volume decline in 2013, and only the midstream segment recorded an increase in total deal value. Upstream remained the most active segment of the market; however upstream slipped to second place in overall deal value behind midstream, which overtook both upstream and downstream to be the largest value segment of European oil and gas M&A in 2013.

The majority of European upstream activity centers on the North Sea, and this segment of the market continued to deliver the greatest share of deal volume with 80 deals reported in 2013. The value of such transactions accelerated in the second half of the year, following a fairly quiet first two quarters. The largest North Sea transaction was OMV's USD 2.65 billion purchase of a portfolio of UK and Norwegian assets from Statoil. Apart from the above-mentioned asset transactions, there were a number of public company takeovers involving European upstream businesses. Canada-listed Ithaca Energy acquired Valiant Petroleum in a deal valued at close to USD500 million, and Norwegian PE-backed.

Spike Exploration acquired Bridge Energy for close to USD 200 million. These transactions are representative of a wider capital markets dynamic, with public takeover deals likely to continue into 2014, reflecting a combination of attractive valuations and stretched balance sheets in the junior space.

The European midstream sector, particularly for gas pipelines, witnessed a number of large transactions reporting seven deals in 2013 with a combined value of USD 9.8 billion. Total divested itsSouth-West France transportation and storage business (TIGF) to a consortium of Snam, GdF and Singapore's sovereign wealth fund for approximately EUR 2.4 billion (USD 3.3 billion). RWE shares in NET4GAS, a Czech gas transmission business, were sold to Allianz and Borealis Infrastructure for a little over USD 2 billion. The involvement of financial buyers in both of these transactions highlights an ongoing trend of disaggregation of European midstream assets, where specialist sources of capital will continue to be likely acquirers from large corporates, seeking to manage their capital across a broader portfolio.

2014 heralds the prospect of strengthening economic recovery in Europe. This should support positive sentiment in midstream and downstream activity, the two segments that have been the most influenced by regional economic trends in recent years. Perhaps counter-intuitively, economic improvement is also likely to crystallize resolution around underperformers and a "refresh" in the financial markets could open the doors for a next generation of growth businesses, particularly likely among Europe's upstream and oil field services sectors, the EY reports states.