The Oil & Gas sector is seeing a marked improvement in 2017.
During 2016, deal activity in the oil and gas sector continued the downward trend that began back in 2011, with the number of announced/completed deals dropping to the lowest point in a decade, due in large part to the depressed oil prices. In 2016, exploration rates were down and many companies were finding it more challenging to access capital. In addition, many of the sector’s big players appeared to be focused on managing their own businesses rather than seeking out M&A opportunities. However, the sector is seeing a marked improvement in 2017.
“For 2017, we are expecting a more positive M&A environment in the oil-and-gas sector, following the low deal volume seen in 2016,” says Mark Andrews, Partner and Head of Oil & Gas with KPMG in the UK. “In 2016 we saw the low oil prices lead to the creation of a valuation gap between would-be buyers and sellers. As a result of this gap, many of the players that would otherwise have been on the lookout for inorganic growth, opted instead to focus on ensuring the sustainability of their own operations.”
Andrews also identified that there was a slight uptick in deals in at least one subsector in 2016 – oilfield services – with an increasing number of companies completing mergers aimed at unlocking synergistic benefits.
Looking ahead, Andrews comments “The first quarter of 2017 has been strong, with a number of substantial deals being announced in the sector. This is due to a relative stabilization of the oil price, compared to 2016, creating a closer alignment of pricing between buyers and sellers and more financing made available to the sector.”
“Over the next 12 months, we’re going to see the continued development of consolidation plays to gain efficiencies and create logistical benefits,” says Andrews. “We also expect to see a rise in the number of innovative deal structures to satisfy the needs of both buyers and sellers, whether those take the shape of price ratchet earn outs, the swapping of assets or deals to put assets in the hands of owners who may be better-suited to operate them.”
Overall, the sector will continue to offer plenty of M&A opportunities in 2017 and beyond, however it is unlikely that the exceptional level of deal activity seen in the first quarter will last, as much of the capital available may have been committed to the deals already announced.