Natural gas and oil executives are less optimistic about the global economy improving over the coming year, according to an Ernst & Young survey of senior energy executives.

Ernst & Young’s bi-annual Oil & Gas Global Capital Confidence Barometer, published on Monday, found that only a little more than one-quarter (27%) “feel that the global economy is strongly or modestly improving,” sharply down from the 55% recorded in the survey six months ago. The intention to sell assets has declined by almost 70%.

The firm surveyed a total of 1,500 senior executives from more than 40 countries, which included 178 oil and gas executives. The oil and gas respondents said uncertainty in the global economy had made them more wary of mergers and acquisitions (M&A), with only 28% expecting to pursue tie-ups in the next 12 months, down from 31% in April and off from 48% a year ago.

For those energy company executives planning to engage in M&A, deal sizes “remain fairly small, reflecting an ongoing aversion to risky, transformation transactions.” Nearly four-fifth (81%) said they would execute deals valued at less than $500 million, while 38% expect to pursue transactions valued under $50 million.

“While the majority of transactions are likely to remain at the smaller end of the spectrum, this does not rule out some larger deals where the strategic rationale is compelling,” said Ernst & Young’s Andy Brogan, who is the advisory leader for the firm’s Global Oil & Gas Transactions.

Confidence in the respondents’ local economies fell dramatically while the appetite for M&A has fallen 10% from six months ago, the survey found. Sixty-one percent of oil and gas respondents said they view the global downturn as lasting at least another year. Respondents with “the most negative sentiment” also were most affected by the Eurozone crisis and slower growth of China.

According to executives surveyed, the “fundamentals of business” are the primary focus, which has led to a decline in prioritizing growth. Nearly half of oil and gas companies (49% of oil and gas respondents) are still focusing on growth, compared with 56% six months ago.

“Companies are increasingly turning their attention to lower-risk organic strategies that are within their comfort zone, rather than pursuing ambitious and transformational deals,” Ernst & Young noted. Since it was launched in 2010, 49% is the lowest figure recorded for growth in the survey.

A “marked decline” is expected for corporate earnings, with only 36% of oil and gas respondents positive about the outlook in October, which the survey was conducted, versus 52% last April. Because of “economic challenges,” oil and gas respondents said they have switched to retention rather than recruitment, with the percentage planning to create jobs falling to 34% in October from 43% in April. The number of respondents planning to keep their current workforce size “has increased significantly” to 59% from 48% six months ago.

“The current uncertainty seems to be driving companies to increase their focus on preserving what they have, whether this is their skilled workforce or their capital,” said Brogan.

More than three-quarters (79%) of the surveyed oil and gas respondents said credit availability was stable or improving. In their debt-to-capital ratio, there has been a shift in sentiment with 79% expecting the ratio to increase or remain constant through 2012, up from 71% in April. More than 80% reported debt-to-capital ratios below 50%, and more than half (53%) had ratios below 25%.

“Oil and gas companies are clearly choosing to retire debt and deploy capital more cautiously. Only 21% were expecting to refinance loans or other debt obligations in the next 12 months, down from 49% in the April survey,” Ernst & Young noted.

“We expect the governing principle of the next six months to be caution,” said Brogan. “However, there are likely to be areas such as oilfield services or unconventionals where activity remains more buoyant.”

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