LONDON, England – Global oil and gas overall deal volume and deal value were down 17.7 percent and 10.8 percent respectively in 2019, as stagnant commodity prices, disappointing results, and low returns left the industry searching for capital.
This is according to the EY Global oil and gas transactions review 2019, which reveals that the transaction activity and valuations largely reflected the re-balancing of portfolios away from upstream liquids and toward gas-focused and downstream assets. Looking ahead, the report projects that the mergers and acquisitions (M&A) landscape will continue to be shaped by energy transition strategies, climate change regulations and the role of natural gas in the future energy mix.
Andy Brogan, EY Global Oil & Gas leader, says: “The oil and gas deal environment continues to reflect uncertainty, as the industry redefines its role and the value of its assets in the face of the growing transition to low-carbon and no-carbon energy. Despite this upheaval, we see an environment in which asset attrition outruns whatever reductions there might be in demand. This means the industry will need to attract capital and offer returns that support continued investment.”
Upstream and downstream deal values were up in 2019 while midstream and offshore services were down.
Upstream deal value was up 17.6 percent. However, if you exclude the two largest deals, value fell 37 percent from 2018 to 2019 and volume fell 21 percent over this same time period. The total deal count declined by more than 20 percent, while the average deal value was US$122 million, in line with the prior year. This is the continuation of a downward trend in deal value and deal volume that began in 2017 when interest in what was thought to be undervalued properties peaked following the 2014 downturn. In 2019, interest in US assets fell dramatically, with deal value dropping from US$74 billion to US$39 billion, accounting for almost all the value reduction globally.
Since 2015, large corporate deals in the US midstream sector had been remarkably stable (ranging between 105 and 135 deals each year) and the year-to-year variation in deal value were determined by the biggest corporate deals. The trend continued but the big deals didn’t happen and overall deal value fell by about 55 percent and the biggest deal in 2019 was ranked as only the ninth-biggest deal in the last five years.
Downstream deal value was up 43 percent to nearly US$124 billion in 2019. However, if you exclude the largest deal, value was down 31 percent and volume fell by 10 percent. Deal activity in North America and Europe fell 70 percent, from nearly US$80 billion in 2018 to US$24 billion in 2019. Deal volume fell 12 percent, from 137 in 2018 to 121 in 2019.
In the oilfield services sector, pricing has remained severely discounted since 2014, and returns have plummeted. An initial wave of interest in midsized (US$1b to US$10b) deals, engineered to consolidate assets at what were believed to be favorable valuations, peaked in 2017 and continued to subside in 2019. Deal value fell by almost 27 percent from 2018 to 2019. Deal volume was equally depressed, falling by almost 20 percent.
Brogan says: “2019 brought a greater focus on environmental, social, governance and energy transition considerations and these will continue to be key themes for how capital is deployed in 2020.
“In upstream, continued portfolio rationalization for majors will lead to deal opportunities for smaller indigenous independents and private equity (PE) backed entities. In midstream, PE and IFFs are likely to continue to be the driving force for M&A, as companies are expected to remain focused on disciplined capital allocation, and any deviation from this path will depend on access to capital. Downstream, particularly in storage and transportation, may see a flurry of activity as firms are forced to re-balance their portfolios and more clearly articulate their strategies.”