Global oil and gas transactions review 2016

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Global oil and gas transactions review 2016

Positive deal outlook after 2016 final quarter surge

Welcome to our annual review of global oil and gas transaction activity. In this report, we look at significant trends in oil and gas deal activity over 2016 and the outlook for transactions in 2017.

In retrospect, 2016 is likely to have seen the low point of the recent oil price downturn. However, the severity of that downturn with crude hitting US$30 a barrel was a major shock to the system for the oil and gas sector.

OPEC’s actions in the fourth quarter signalled a firm move of prices above US$50 a barrel and established a greater consensus around a medium-term pricing outlook, which released pent-up demand and drove a surge in M&A activity which has carried through into 2017.

The oil and gas industry continues to reconfigure its business model to help it sustain and grow in a lower oil price environment. In conjunction with standardization and cost cutting, they are increasingly adopting digitalization to redesign and simplify their businesses and improve performance.

Watch our webcast for more information about the 2017 transactions outlook.

2017 expectations vary across subsectors

Regional deals subdued in 2016

US$130b – Total upstream deal value drops 14% year on year

Upstream fourth quarter increases show potential for positive 2017

Overall transaction activity for 2016 improved over 2015 (excluding 2015’s Shell and BG deal), driven by a particularly significant increase in the fourth quarter — a sign of renewed confidence entering the market.

The US led the way, with record Permian basin deal volumes, as the North American industry saw more than US$76 billion in upstream transactions versus US$43 billion in 2015. Significant activity was also experienced in Russia, which recorded the three largest transactions outside of North America.

In many other geographies, 2016 transaction activity remained muted as buyers and sellers struggled to reach value consensus in the face of price shocks buffeting the industry.

Several factors, consistent across all jurisdictions, drove the industry’s capital allocation decisions and resultant transactions activities.

Upstream oil and gas transactions (reported deal value by region and global volume)

EY Upstream oil and gas transactions

Key transaction themes expected in 2017 include:

  • The resolution of 2016’s distressed situations through new transactions and refinancing activity
  • The increasing availability of quality assets for acquisition as part of accelerated portfolio optimization programs
  • The increasing influence and presence of PE capital, especially in North America, that will leverage access to plentiful capital and long-term value creation bias (rather than quarterly stock performance) into stronger returns
  • The rise of creative deal structures, such as through joint ventures, as parties seek to share project and capital risk
US$146b – Total midstream deal value up 29% year on year


Midstream up with megadeal activity

Early in 2016, growing financial distress on E&P operators fueled fears related to counterparty risk, resulting in significant negative pressure on trading levels for midstream companies.

Once again, activity in the US and Canada dominated 2016 transaction activity, accounting for 89% of deal volume and 93% of deal value. With a jittery market to begin the year, deal activity in 2016 was a tale of two halves, with the second half of the year accounting for 57% of total deal volume and 84% of total deal value.

Midstream oil and gas transactions (reported value by region)

EY Mid-stream oil and gas transactions

Key transaction themes expected in 2017 include:

  • Midstream operators aggressively seeking out transaction opportunities to generate capital synergies by diversifying their portfolio across multiple dimensions
  • Divestiture of midstream assets by E&P companies either because of loss of strategic value or financial stress
  • Continued sale of midstream assets from financially stressed NOCs, to address declining production levels
131 – Total downstream deal volume down 17% year on year

Downstream integration resurfaces

Downstream deal values totalled US$65.9 billion in 2016, up 30% from 2015 and more than double the average of reported deal values over the past five years of approximately US$28.8 billion.

Similar to the past five years, the US and Europe continue to have the highest levels of activity in the downstream despite a decline compared to prior years.

In 2016, investments into pipelines continued to outpace other sub-sectors in the downstream representing 38.3% of total deal values. Investments into refining and service stations also increased during the year, with increases of 16.2% and 7.5%, respectively.

Downstream oil and gas transactions (reported deal value by region)

EY - Downstream oil and gas transactions

Expectations for 2017 include:

  • We expect 2017 to be a stronger year for deal activity, with a continued focus on large-scale transaction activity between petrochemicals players and potential forward integration into petrochemicals from both independent refiners and integrated oil companies
  • Major oil companies, stronger independents and globally focused NOCs to continue to concentrate on integrating with refining, LNG and petrochemicals players to capture the implied market value across the value chain
  • Low oil and natural gas prices in North America likely to create investment opportunities
US$53b – Total deal value up 106% year on year

Oilfield services expectations of consolidation

The oilfield services (OFS) sector has faced sharp volume declines since the oil price dropped in June 2014, leading to overcapacity and significant price concessions throughout the downturn.

The OFS segment must now evolve to cope with a radically changing business environment. Lower commodity price levels have dramatically changed the global activity footprint in terms of both geography and reservoir type. Operators are seeking greater alignment with their supply chain across the entire asset life cycle and are making the organizational and purchasing behavior changes necessary to promote this outcome.

OFS oil and gas transactions

EY OFS oil and gas transactions

Expectations for 2017 include:

  • A high focus on technology and digital transactions into 2017 by larger players as they look to bolster their R&D efforts
  • Well-positioned and healthy OFS companies and financial investors are likely to drive market consolidation across three dimensions:
    • Opportunistic acquisition of distressed assets
    • Strategic acquisitions or combinations
    • Footprint and portfolio repositioning