Declining Optimism Stifles M&A Activity

Declining optimism over the global economic outlook and corporate earnings expectations due to the Eurozone crisis and slowing growth in China and India has weakened oil and gas companies' appetite for mergers and acquisitions (M&A) as they shift their focus towards bottom line improvements and near-term organic growth.

Twenty-eight percent of the oil and gas respondents surveyed planned to pursue acquisition in the next 12 months, down from 31 percent in April of this year and down from 48 percent a year ago, according to Ernst & Young's (E&Y's) Seventh Global Capital Confidence Barometer.

The barometer, which is released every April and October, is used to gauge corporate confidence in the economic outlook of senior executives. E&Y surveyed 1,500 senior executives in over 40 countries, including the 178 oil and gas executives. E&Y's survey on M&A activity encompasses all sectors of the energy industry.

Twenty-four percent attributed low confidence in the business environment as a reason for not pursuing acquisitions in the next year. The regulatory environment and valuation gaps between potential acquisition and the prices sought by sellers are also behind weak interest in M&A activity. Additionally, many executives perceive acquisition targets to be overpriced, E&Y noted.

Oil and gas companies that are pursuing M&A activity anticipated smaller deals, with 81 percent of those surveyed said they would execute deals valued at less than $500 million, while 38 percent will pursue transactions under $50 million. This suggests that deals being considered will extend existing businesses and fill strategic gaps, also known as bolt-on acquisitions.

"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 Andy Brogan, E&Y's Global Oil & Gas Transactions Advisory Leader, in a statement.

The United States, Brazil, Canada, China and the UK are the top five likely destinations for outbound investment, according to the results of E&Y's survey. The United States will likely remain a hot space in terms of M&A interest as large integrated and national oil companies with deep pockets and strategic intent will likely continue to show interest in U.S. shale plays, said Mellen.

Fifteen percent of oil and gas respondents expect to divest assets in the next 12 months, down from 47 percent in April 2012. The main drivers behind planned divestment activity include focusing on core assets; enhancing shareholder value; and shedding underperforming business unit. 


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