Instead of jumping in, natural gas and oil companies instead may wade into the mergers and acquisitions (M&A) pool this year until they have more confidence in the broader business environment, according to the sixth Ernst & Young Global Capital Confidence Barometer.
Less than one-third (31%) of the 141 energy executives surveyed by the consultancy in April plan to pursue an acquisition over the coming year, down sharply from 48% who said they would in October -- and the lowest figure since the barometer surveys began in 2009. However, the number of businesses readying assets for the marketplace has risen, a potential sign that companies are putting a renewed focus on portfolio management and their core businesses.
"While oil and gas executives are in a more confident frame of mind, they are still applying caution to M&A," said Ernst & Young's Andy Brogen, who leads advisory services for oil and gas global transactions. "Economic outlooks remain uncertain and geopolitical instability continues to be a concern."
When asked why they wouldn't be in the market for new assets, most respondents cited low confidence in the global business environment, as well as limited deal and execution capabilities. In addition, 39% expect the price/valuation of M&A assets to increase over the next 12 months, while close to half (46%) believe that operating cost synergies would be the most challenging to deliver deal value.
"By contrast, the oil and gas companies expect divestment activity to increase significantly over the next 12 months," Brogan noted. "The percentage likely to sell assets over this period has risen from 20% in April 2011 to 47% in April 2012, highlighting that organizations are remaining conservative and focusing on their core business."
More than half viewed the global economy as improving, well above only 22% who saw it as improving last October. Nearly all -- 91% -- expect to maintain or increase their current workforce over the coming year. About 88% said the Eurozone crisis has affected their business, and not surprisingly, companies based in the Eurozone were more negative in their sentiments.
Credit availability was seen as "stable" or "improving" by 87%, with many taking advantage of improved credit conditions and a favorable rate environment to strategically use additional leverage and reduce their cost of capital. Almost three-quarters (71%) of the executives responding expect their debt-to-capital ratio to decline or remain constant over the coming year, while about half (49%) plan to use debt to finance deals, which is up from 30% in October.
"For many, oil and gas companies' growth continues to be of critical importance, with 56% citing growth as their primary focus," noted Brogan. "If the economic outlook remains relatively benign, then this should feed through into an increased appetite for acquisitions as the year progresses."
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