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E&Y sees busy year for global oil and gas M&A

The consultancy carried out a study which suggests 37% of companies are planning M&A activity

A new study carried out by consultancy Ernst and Young has found that up to 37% of global oil and gas companies are planning to shed assets and divest interests in marginal plays over the next two years.

The firm’s annual Global Corporate Divestment survey found that 17% of upstream respondents are in the process of selling assets and another 20% are planning to do so within the next two years. The survey results indicate a brisk period of merger and acquisition (M&A) activity ahead, hard on the heels of what was a record year in 2012.

According to Houston-based PLS, the value of global oil and gas divestitures jumped 33% in 2012, to $254 billion from $170bn in 2011. Led by China National Offshore Oil Corporation’s $15.09bn takeover of Nexen, North America accounted for $133bn, or more than half, of all M&A last year.

Ernst and Young’s oil and gas team leader, Barry Munro, estimates that 50% of all North American producers are planning to rationalise their portfolios in the next 18 months to two years. In an interview, Munro said the primary motivation is capital discipline and cash conservation. North America’s shale basins have yielded enormous development opportunities, but funding them all is proving difficult in a period of low commodity prices.

Henry Hub futures have barely topped $3 per million British thermal units (Btu) this winter - the March contract closed at $3.16/m Btu on 14 February. Meanwhile, Bakken and Permian oil trades at wide discounts of up to 30% against WTI and Brent. Consequently, producers are being forced to reallocate priorities and cash to the highest return assets.

“(Shale gas and tight oil) left most companies with far more projects than capital. The reality is that’s what driven the search for foreign partners,” he said.

But diminishing returns in the sector as a whole are increasing competition and placing downward pressure on valuations.

Though he foresees a “brisk buyers market”, Munro is reluctant to call it a fire sale. Rather, he sees a new class of buyer - Asian state entities and trading houses - that are taking a longer-term view to vertical integration in North America’s upstream.

It’s all part of a trend to greater globalisation in energy and investment markets, he added. “There’s an awful lot of sovereign money floating around,” he said. “It’s a global market now, and what’s needed is thoughtful global thinking about assets.”

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