Global oil and gas deal activity in 2016 recovered from a slow start to the year with help from the announcements of midstream and oilfield services (OFS) megadeals.
According to the Ernst & Young Global Oil and Gas Transaction Review 2016, deal value increased to US$395 billion from $340 billion in 2015, while deal volume fell by 27% year-on-year.
Upstream deal value fell 14% to $130 billion in 2016 compared to $153 billion in 2015. However, when excluding the Royal Dutch Shell and BG Group megadeal in 2015, upstream transaction activity improved in 2016.
The majority of transactions originated in the US, with record Permian basin deal volumes. Deal value in North America exceeded $76 billion in 2016 compared to US$43b in 2015. Activity remained muted in other geographies as buyers and sellers struggled to bridge the valuation gap.
While recent distress is expected have a lasting impact on higher-cost geographies, like South America, Africa and parts of the Middle East and Asia, upstream deal activity is expected to accelerate as portfolio optimization continues and national oil companies experience pressure from cutbacks.
North America dominated midstream transaction activity as well, though continued oil price volatility slowed the boom in shale infrastructure projects. Deal volume in the sub-sector fell 28% to 93 deals in 2016 compared to 105 in 2015.
Deal value, however, increased by 29% to $146billion year-over-year. A mild resurgence of capital spending in shale and North American petrochemical and liquefied natural gas infrastructure projects is expected to lead midstream activity in 2017.
Across Asia-Pacific, deal activity in 2016 was subdued for the second consecutive year, recording the lowest number and value of deals over the past five years. Total transaction value for the year was $10.5 billion, with three megadeals accounting for the bulk of the value. In terms of outbound transactions, Asian companies to focus on North America, followed by Russia and Europe.
On the outlook across Asia-Pacific, Sanjeev Gupta, EY Asia-Pacific Oil & Gas leader said, “Deal activity is expected to increase significantly in 2017 as oil majors accelerate divestments in the region, in line with their active portfolio management initiatives.
“Mature or mid-life upstream assets, and lower-risk or lower-return downstream assets and businesses will likely top the list. Deal closures, driven by stabilized oil prices, and expansion of Russia’s strategic partnerships with Asia, will also likely fuel transaction activity in 2017. However, the distress of 2016 will continue to have implications in higher-cost geographies of Asia.”
Downstream deal value increased by 30% in 2016 to $65.9 billion from $51.5 billion in 2015 – more than double the average annual reported deal value in the past five years. The sub-sector saw fewer but larger deals.
Two deals valued at more than $10 billion by Rosneft and a consortium led by Macquarie represented 36% of this total value. Meanwhile, deal volume declined by 17% to 131 deals from 142 in 2015. Activity was led by the US and Europe, representing 66% and 65% of total downstream deal value, respectively.
Looking ahead, 2017 is expected to be a stronger year for downstream transactions, with deals motivated by the desire for upstream and downstream integration to create value – a strategy downplayed during the period of high oil prices.
OFS showed signs of recovery with deal volume declining by just 2% and deal value increasing 106% to $53 billion in 2016. Continued financial stress and overcapacity is expected to drive further consolidation in 2017.
“This year promises to mark a continuation of the transition from survival to value creation in the global oil and gas sector,” said Andy Brogan, EY Global Oil & Gas transactions leader.
“Companies are very firmly focused on delivering value but as investor attitudes change this will inevitably bring growth back into the picture. If capital availability and the valuation gap between buyers and sellers improves alongside a stable oil price, it should be an interesting year for transactions.”
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