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E&P Execs More Focused on Capital Discipline, Less on M&A, Says Survey

An increased focus on capital returns, uncertainty over global commodity prices and rising geopolitical risks have dampened enthusiasm among exploration and production (E&P) executives worldwide, a survey has found.

Even though the global economy may be increasingly stable, with resilient equity markets, but landscape for oil and gas merger and acquisition (M&A) activity is only cautiously optimistic, according to EY's 11th biannual Oil and Gas Capital Confidence Barometer.

EY surveyed more than 100 E&P executives worldwide and found that almost all of them -- 94% -- expect the global economy to improve or be stable in the next year. Confidence in corporate earnings also is rising, almost double since October 2013. However, respondents said rising geopolitical risks, an increased focus on capital returns and uncertainty over global commodity prices have dampened forecasts in the short-term, unlike a year ago when there were a "clear rebound" in executives' confidence (see Daily GPI, Nov. 14, 2013).

The survey found that:

  • More than half (53%) see geopolitical instability as the "greatest" economic risk in the next 12 months;
  • Sixty-two percent primarily are focused on "optimizing capital rather than investing," and
  • Close to half (45%) see reducing costs and improving margins as the primary drivers of deal activity.

“As companies react to the recent drop in oil prices, we are seeing an even greater focus on capital discipline," said EY's Andy Brogan, global leader, oil and gas transaction advisory services. "More and more companies are positioning themselves for growth in this challenging environment by returning to their roots, refocusing their exploration spend and concentrating on core areas.”

The appetite to execute deals is "cautiously growing," according to the survey. More than half of all respondents expect deal volumes to increase over the coming year, but only 25% expect to pursue acquisitions, down from 30% earlier this year.

"More than two-thirds of respondents expect their M&A pipelines to expand further over the next year," the survey said. "Importantly, the number of respondents anticipating deterioration in the M&A environment is now negligible."

Deals that are "transformative," which significantly change the size or scope of a company, likely will continue, respondents said. More than one-third said they are considering transformative transactions in the coming months.

However, the strongest growth is expected to be the mid-sized deals. More than half of the respondents expect "maximum single deal values" of $250 million or less. At the same time, close to two-thirds (61%-plus) plan to concentrate on optimizing capital, a sharp reversal from a year ago when companies primarily were focused on investing. A lot of new activity is expected to focus on strengthening and expanding core businesses.

“More oil and gas companies are focused on acquiring businesses in their core sectors," Brogan said. "While growth led the strategic agenda for oil and gas companies a few years ago, companies are now much more focused on optimizing the portfolio, controlling costs and managing the risk profile. These companies are assessing a range of transaction drivers, but efficiencies are paramount.

"Renewed discipline in deal-making is also forcing companies to thoroughly examine many more investment opportunities to find the best strategic fit."

ISSN © 2577-9877 | ISSN © 2158-8023

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