In retrospect, 2016 is likely to have seen the low point of the recent oil price downturn. However, the severity of that downturn with crude hitting US$30 a barrel was a major shock to the system for the oil and gas sector.
OPEC’s actions in the fourth quarter signalled a firm move of prices above US$50 a barrel and established a greater consensus around a medium-term pricing outlook, which released pent-up demand and drove a surge in M&A activity which has carried through into 2017.
The oil and gas industry continues to reconfigure its business model to help it sustain and grow in a lower oil price environment. In conjunction with standardization and cost cutting, they are increasingly adopting digitalization to redesign and simplify their businesses and improve performance.
Sector deal value increased 16% year-on-year while volume declined
Fourth quarter momentum set to carry forward in 2017 as market stabilizes
Global oil and gas deal activity in 2016 recovered from a slow start to the year with help from the announcements of midstream and oilfield services (OFS) megadeals. According to the EY Global oil and gas transaction review 2016, deal value increased in 2016 to US$395b from US$340b in 2015, while deal volume fell by 27% year-on-year.
Andy Brogan, EY Global Oil & Gas Transactions Leader, says:“Transactions took a back seat to the more urgent task of adapting to new economic realities in the sector last year. A number of deals were initiated but not completed amid ongoing volatility. Now, with the consensus throughout the sector that the worst is behind us, we’re starting to see a shift as companies realize that there may be a cost to inaction. We expect to see the momentum that began in the fourth quarter of 2016 continue in the year ahead.”
Upstream deal value fell 14% to US$130b in 2016 compared to US$153b in 2015. However, when excluding the Royal Dutch Shell and BG Group megadeal in 2015, upstream transaction activity improved in 2016. The majority of transactions originated in the US, with record Permian basin deal volumes. Deal value in North America exceeded US$76b in 2016 compared to US$43b in 2015. Activity remained muted in other geographies as buyers and sellers struggled to bridge the valuation gap.
While recent distress is expected have a lasting impact on higher-cost geographies, like South America, Africa and parts of the Middle East and Asia, upstream deal activity is expected to accelerate as portfolio optimization continues and national oil companies (NOCs) experience pressure from cutbacks.
North America dominated midstream transaction activity as well, though continued oil price volatility slowed the boom in shale infrastructure projects. Deal volume in the sub-sector fell 28% to 93 deals in 2016 compared to 105 in 2015. Deal value, however, increased by 29% to US$146b year-over-year. A mild resurgence of capital spending in shale and North American petrochemical and LNG infrastructure projects is expected to lead midstream activity in 2017.
Downstream deal value increased by 30% in 2016 to US$65.9b from US$51.5b in 2015 – more than double the average annual reported deal value (US$28.8b) in the past five years. The sub-sector saw fewer but larger deals. Two deals valued at more than US$10b – by Rosneft and a consortium led by Macquarie – represented 36% of this total value. Meanwhile, deal volume declined by 17% to 131 deals from 142 in 2015. Activity was led by the US and Europe, representing 66% and 65% of total downstream deal value, respectively.
Looking ahead, 2017 is expected to be a stronger year for downstream transactions, with deals motivated by the desire for upstream and downstream integration to create value – a strategy downplayed during the period of high oil prices.
OFS showed signs of recovery with deal volume declining by just 2% and deal value increasing 106% to US$53b in 2016. Continued financial stress and overcapacity is expected to drive further consolidation in 2017.
Brogan says: “This year promises to mark a continuation of the transition from survival to value creation in the global oil and gas sector. Companies are very firmly focused on delivering value but as investor attitudes change this will inevitably bring growth back into the picture. If capital availability and the valuation gap between buyers and sellers improves alongside a stable oil price, it should be an interesting year for transactions.”
Upstream fourth quarter increases show potential for positive 2017
Overall transaction activity for 2016 improved over 2015 (excluding 2015’s Shell and BG deal), driven by a particularly significant increase in the fourth quarter — a sign of renewed confidence entering the market.
The US led the way, with record Permian basin deal volumes, as the North American industry saw more than US$76 billion in upstream transactions versus US$43 billion in 2015. Significant activity was also experienced in Russia, which recorded the three largest transactions outside of North America.
In many other geographies, 2016 transaction activity remained muted as buyers and sellers struggled to reach value consensus in the face of price shocks buffeting the industry.
Key transaction themes expected in 2017 include:
The resolution of 2016’s distressed situations through new transactions and refinancing activity
The increasing availability of quality assets for acquisition as part of accelerated portfolio optimization programs
The increasing influence and presence of PE capital, especially in North America, that will leverage access to plentiful capital and long-term value creation bias (rather than quarterly stock performance) into stronger returns
The rise of creative deal structures, such as through joint ventures, as parties seek to share project and capital risk
Midstream up with megadeal activity
Early in 2016, growing financial distress on E&P operators fueled fears related to counterparty risk, resulting in significant negative pressure on trading levels for midstream companies.
Once again, activity in the US and Canada dominated 2016 transaction activity, accounting for 89% of deal volume and 93% of deal value. With a jittery market to begin the year, deal activity in 2016 was a tale of two halves, with the second half of the year accounting for 57% of total deal volume and 84% of total deal value.
Key transaction themes expected in 2017 include:
Midstream operators aggressively seeking out transaction opportunities to generate capital synergies by diversifying their portfolio across multiple dimensions
Divestiture of midstream assets by E&P companies either because of loss of strategic value or financial stress
Continued sale of midstream assets from financially stressed NOCs, to address declining production levels
Downstream integration resurfaces
Downstream deal values totalled US$65.9 billion in 2016, up 30% from 2015 and more than double the average of reported deal values over the past five years of approximately US$28.8 billion.
Similar to the past five years, the US and Europe continue to have the highest levels of activity in the downstream despite a decline compared to prior years.
In 2016, investments into pipelines continued to outpace other sub-sectors in the downstream representing 38.3% of total deal values. Investments into refining and service stations also increased during the year, with increases of 16.2% and 7.5%, respectively.
Downstream oil and gas transactions (reported deal value by region)
Expectations for 2017 include:
We expect 2017 to be a stronger year for deal activity, with a continued focus on large-scale transaction activity between petrochemicals players and potential forward integration into petrochemicals from both independent refiners and integrated oil companies
Major oil companies, stronger independents and globally focused NOCs to continue to concentrate on integrating with refining, LNG and petrochemicals players to capture the implied market value across the value chain
Low oil and natural gas prices in North America likely to create investment opportunities
Oilfield services expectations of consolidation
The oilfield services (OFS) sector has faced sharp volume declines since the oil price dropped in June 2014, leading to overcapacity and significant price concessions throughout the downturn.
The OFS segment must now evolve to cope with a radically changing business environment. Lower commodity price levels have dramatically changed the global activity footprint in terms of both geography and reservoir type. Operators are seeking greater alignment with their supply chain across the entire asset life cycle and are making the organizational and purchasing behavior changes necessary to promote this outcome.
Expectations for 2017 include:
A high focus on technology and digital transactions into 2017 by larger players as they look to bolster their R&D efforts
Well-positioned and healthy OFS companies and financial investors are likely to drive market consolidation across three dimensions:
Opportunistic acquisition of distressed assets
Strategic acquisitions or combinations
Footprint and portfolio repositioning
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