Oil & gas transactions – The New World

Back to the good old days?

Following a sustained period of underinvestment in the oil and gas industry in line with global economic conditions, it appears that the industry is very much back in growth mode.  Increased confidence, visibility and international opportunities in the sector are driving investment, resulting in an uptick in strategic Mergers and Acquisitions (M&A).  However, we are unlikely to see a return to pre-2008 levels of activity as investors and shareholders are taking a much more pragmatic, balanced approach to growth.  So what has changed?

Confidence returns

Companies are increasingly focusing on two distinct areas for growth opportunities: deep water and shale oil.

At the moment there is a period of buoyancy in the global oil and gas market, with increased capital investment driven by high, stable commodity prices.  With oil prices at their current high levels (Brent Crude is c.$106/barrel at the time of writing) - coupled with exploration and development decisions being made off the $80/barrel mark - activity is ramping up in deeper, harder to reach environments such as West Africa, Brazil and West of Shetland.  The level of capital expenditure required for deepwater developments is higher than for shallow water, and is expected to rise from a 38% share in 2012 to a 53% share of global offshore capital expenditure by 2017[1].

The “shale oil revolution” is also very much underway.  Shale oil is rapidly emerging as a significant and relatively low cost new unconventional resource in the US. There is potential for production to spread globally over the next couple of decades, especially in Eastern Europe, Argentina, Australia, China and even the UK. If it does, shale oil has the potential to reshape the global economy and increase energy security, independence and affordability in the long term. The environmental impact and political backdrop also requires greater understanding and significant mid and downstream infrastructure development will be required.

 Caution and strategy

There is no doubt that there are significant opportunities for companies across the oil and gas value chain from short term initiatives through to longer term strategic projects.  Following the economic slowdown, we are seeing business take a much more cautious approach to growth, with a greater focus on working capital requirements, funding needs and ultimate return on investment.  With this in mind, businesses are still looking to gain access to new growth markets, as well as expanding their product and service offering. All of this is resulting in an increase in M&A in the sector.

Transaction multiples rise…but with a greater deferred element

In absolute terms, we are gradually seeing transaction multiples trend upwards to levels more consistent with pre-2008 levels.  The caveat to this however, is that acquirers are becoming much more risk aware with transaction structures and are moving significant elements of value to deferred earn-outs or contingent elements based on future hurdles.  Of course valuations can be significant for businesses with a solid platform, international presence and visible growth opportunities.

Easier access to capital…for the right asset

Access to capital has been an area of contention for a number of years now. However, we are beginning to see bank funding become much easier to access.  Banks are still highly focused on long term stability of cash flows, but general sector lending appetite is strong and banks are committed to investing in oil and gas.  There is also significant appetite from private equity investors with fund spending pressure and scarcity of good opportunities driving interest.

A positive future looms

The oil and gas sector is, and is likely to continue to be, a high growth environment for the foreseeable future.  We are seeing an uplift in strategic M&A as businesses look to move into new markets and take advantage of the growing opportunities in the global market.  

The only question that remains is how do you plan to take advantage of the growth? Share your thoughts below or contact us to set up a meeting to discuss things more confidentially here.

[1] Infield Systems – 9th Edition, Global Perspectives Deep & Ultra Deepwater Market Report to 2017


Adam Maitland | Assistant Director, Oil & Gas
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