Key findings of the bi-annual Oil & Gas Global Capital Confidence Barometer indicate that only 27% of oil and gas executives feel that the global economy is strongly or modestly improving, down sharply from 55% just six months ago and that the intention to sell assets is down by almost 70%. It is evident that economic recovery is taking longer than expected.
The global survey of 1,500 senior executives from over 40 countries, which includes 178 oil and gas executives, also finds that uncertainty in the global economy has made oil and gas companies more wary of mergers and acquisitions. Only 28% are expecting to pursue acquisitions over the next 12 months, down marginally from 31% in April and significantly down from 48% a year ago.
For those oil and gas companies that anticipate engaging in M&A, deal sizes remain fairly small, reflecting an ongoing aversion to risky, transformation transactions. Eighty-one percent of those surveyed indicated that they will execute deals valued at less than US$500m and 38% will pursue transactions under US$50m.
Andy Brogan, Ernst & Young's Global Oil & Gas Transactions Advisory Leader explains, "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."
Respondents' confidence in their own local economy is also down sharply and M&A appetite is down by 10%, compared to six months ago. Sixty-one percent of oil and gas respondents indicated that they view the global downturn as lasting at least another year. The countries with the most negative sentiment are those most affected by the Eurozone crisis and the slowing growth of China.
Desire for growth declines
Companies have remained focused on the fundamentals of business, which has lead to a decline in the prioritization of growth. While the survey reflects this, nearly half of oil and gas companies (49% of oil and gas respondents) are still focusing on growth compared to 56% six months ago. Companies are increasingly turning their attention to lower-risk organic strategies that are within their comfort zone, rather than pursuing ambitious and transformational deals. Since the survey began in 2010, 49% is the lowest figure recorded for growth.
There has been a marked decline in expectations for corporate earnings, with only 36% of oil and gas respondents positive about the outlook in October 2012, compared with 52% in April 2012. In light of the economic challenges, the focus of oil and gas respondents has switched slightly from recruitment to retention with the percentage planning to create jobs decreasing from 43% in April to 34% in October. Meanwhile, the number of respondents planning to keep their current workforce size has increased significantly from 48% to 59%.
Brogan comments: "The current uncertainty seems to be driving companies to increase their focus on preserving what they have, whether this is their skilled workforce or their capital."
Access to capital and deleveraging trends
Seventy-seven percent of oil and gas respondents view credit availability as stable or improving. When reviewing debt-to-capital ratio, there was a shift in sentiment with 79% expecting the ratio to increase or remain constant over the next three months. This is up from 71% in April. More than 80% reported debt-to-capital ratios below 50%, and 53% with ratios below 25%. Oil and gas companies are clearly choosing to retire debt and deploy capital more cautiously. Only 21% were expecting to refinance loans or other debt obligations in the next 12 months, down from 49% in the April survey.
Brogan concludes, "We expect the governing principle of the next six months to be caution. However, there are likely to be areas such as oil field services or unconventionals where activity remains more buoyant."
Access the full report here: Oil & Gas Global Capital Confidence Barometer Oct. 2012- Apr. 2013