Oil and natural gas executives are more optimistic than late last year about the global economy, and most expect to either maintain or hire more employees over the coming year, but they still remain focused on “lower-risk growth” rather than on mergers and acquisitions (M&A), according to a survey by Ernst & Young.

The semi-annual Global Capital Confidence Barometer, completed in April and October, is intended to gauge corporate confidence in the economic outlook. Nearly 1,600 executives worldwide were questioned, with 152 representing the oil and gas industry. Overall, 44% of the oil and gas leaders said they believe the economy is improving, significantly more than 27% in October (see Daily GPI, Nov. 6, 2012). Over the next year, nearly all (92%) expect to maintain or hire more employees; 54% are planning to create jobs or hire more people.

“While general confidence in the state and outlook of the economy is improving, this is accompanied by increasing levels of uncertainty about the direction of travel of commodity prices in general, and oil and gas prices in particular,” said Global Oil & Gas Transactions leader Andy Brogan. “This is leading to a valuation disconnect, which is delaying many transactions.”

Since the 2008 global financial crisis, “the oil and gas sector has proved remarkably resilient,” noted Brogan. “Going forward we expect the sector to remain resilient both from an operational and an M&A perspective. However, with expectations on forward price curves for oil and gas subject to increasing uncertainty, we can see that pricing is going to be a key issue in the transaction markets over the next six months.”

There is more enthusiasm than there was last October, but many in the energy industry are choosing to focus on “lower-risk growth rather than M&A,” said researchers. “In fact, 61% of respondents consider growth their primary focus — the highest percentage since April 2011 — but only 27% percent expect to pursue acquisitions in the next 12 months. This tells us that many companies are looking to grow through efficiency, better execution in current markets, technology and competency changes rather than through transformational deals.”

Capital allocation is on the minds of about two-thirds of the respondents, with executives indicating it is a “greater focus” than it was a year ago. Also, more than half (58%) foresee improvement in credit availability.

Over the coming year, more than one-quarter (27%) expect to undertake some M&A activity, and close to three-quarters (72%) expect global deal volumes to increase. About 43% believe most of the divestments will be from business unit spinoffs or initial public offerings.

The global oil and gas sector has been one of the “most resilient” for M&A over the past five years, but “this survey sees a slight decrease in sentiment, with 27% of respondents now expecting to pursue acquisitions over the next 12 months, down from 28% in October 2012 and 31% a year ago. It is not just a lack of confidence in the business environment that is holding companies back — many are also concerned about the gap between their valuation of potential acquisitions and the prices sought by sellers.”

The M&A appetite also appears to have declined.

“Five years after the financial crisis, many executives are still waiting for more price visibility before taking action,” said the report. “That conservatism aside, oil and gas respondents expect that global M&A deal volumes will increase over the next 12 months, with 72% expecting volumes to at least modestly improve.”

Energy operators in general are more focused on growth than other global companies, the survey found. “Growth remains the No. 1 objective for a majority of our oil and gas companies, with 61% reporting that growth is their primary focus, as compared to 20% whose primary focus was on cost reduction and operational efficiency, and 17% whose focus was on maintaining stability. This is the highest percentage of respondents citing growth as their top priority since April 2011.”

Oil and gas companies in particular also see credit conditions “loosening” substantially from a year ago, and they are using the improved conditions to delever the balance sheets. More than three-quarters indicated that debt-to-capital ratios were below 50%, with about two-fifths reporting ratios of less than 25%, better results than in October.

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