U.S. oil and gas merger and acquisition (M&A) activity will be stronger this year as companies attempt to position themselves for higher prices and increased demand, according to a nationwide survey of CFOs at 100 exploration and production companies.
BDO USA LLP's 2013 Energy Outlook Survey, which was published Wednesday, was conducted in September and October.
More than half (53%) of CFOs expect M&A activity to increase this year, the second consecutive year most of the financial officers have predicted an upward trend (see Daily GPI, Jan. 10, 2012). A portion of the latest report was issued in late November; CFOs had said then they were cautious but optimistic about unconventional production in 2013.
"Despite a weak national economy, and some uncertainty over the ability to access capital and credit, overall market conditions have created an environment conducive to M&A activity," said BDO's Charles Dewhurst, practice leader in the Natural Resources industry group. "The energy sector has seen a lot of consolidation in 2011 and 2012. Companies anticipate this trend will carry over to 2013, buoyed by several factors, including the continued exploration and development of nonconventional resources."
A focus on revenue and profitability is considered the top driver this year for M&A. Thirty-six percent of CFOs noted the need for companies to be cash-positive, and 29% suggested that "undervalued oil and gas assets will help push more companies to consider a merger or acquisition."
Only 3% of those surveyed thought M&A would be the "primary driver" for industry growth this year. "Moreover, the pursuit of a merger or acquisition is cited by just over a quarter of CFOs (26%) as a top option for increasing shareholder value, polling slightly behind a focus on nonconventional areas (28%)," BDO noted.
The survey also found that access to capital and credit remains in limbo.
"After a jump in optimism in 2011, CFOs are reining in their expectations that they will be able to access capital in the coming year. While a majority (59%) say they feel better about it, this still represents a 19% percent decrease in the number of CFOs expressing positivity since 2011" (see Daily GPI, Dec. 12, 2011). "Forty-one percent report feeling worse, up from 27% last year."
Companies also are tying executive compensation more to performance, the survey found. "CFOs have expressed a consistent desire to link the two areas for the past five years, and the study reveals 58% amended their executive compensation programs in 2012 to improve the pay-performance connection," the highest percentage since the survey's inception.
"I think this demonstrates a calculated and proactive effort on behalf of companies to strengthen their internal infrastructure by more closely aligning their pay to measurable outcomes," said BDO's Lance Froelich, senior director in the Compensation and Benefits practice. CFOs are confident they will continue to profit from their companies' successes: 89% expect their compensation to remain about the same or improve in 2013. "This suggests a fundamental optimism by CFOs that their companies will continue to perform in 2013 and that success will be reflected in their incentive pay."
About two-thirds of those surveyed expect employment in the oil and gas sector to remain "relatively consistent with that of 2012." However, one-quarter of the CFOs "expect an uptick in the number of personnel employed by their company in the coming year, while only 8% predict a decline. A quarter of the executives also expect an increase in fiscal year 2012 employee bonuses, and nearly double this amount (43%) feel bonuses will stay at the same solid payout levels as in fiscal year 2011.
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