Oil and gas companies this month started releasing their 2012 spending plans. Industry appears to be cautiously optimistic, buoyed by recent $100/bbl oil prices and anticipated long-term energy demand growth.
Ernst & Young LLP foresees rebounding merger and acquisition activity for oil and gas companies despite continuing market upheavals. The year 2011 brought a series of struggles: political unrest in North Africa and parts of the Middle East along with the Japanese earthquake and Fukushima nuclear power plant disaster.
Yet, E&Y sees leading oil companies shrugging off market upheavals and instead focusing on growth.
"In the end, the industry has evolved in such a way that it is less impacted by the lagging economies of developed countries," E&Y noted. "The industry has globalized, diversified, and created additional opportunities, thereby making it better able to protect against broader market fluctuation."
Marcela Donadio, E&Y Americas oil and gas leader, sees most oil and gas corporations headed toward a strong ending to 2011 despite great uncertainty in the broader business market.
"I would not characterize the economy as robust and thriving by any means, but the oil and gas industry is holding up well," Donadio said. "New sources of energy supply and the globalization of energy markets have created opportunity and balance for the industry."
Stable world economy
Just over half of the 92 oil and gas companies responding to E&Y's fifth capital confidence survey said they consider the global economy to be stable or moderately improving. When asked about the state of their local economy, 73% of the oil and gas respondents cited stable or improving economics.
Investing remains a top priority with 48% of oil and gas respondents surveyed expecting to make an acquisition during 2012. E&Y noted the oil and gas industry is slightly more optimistic than the 41% of a broader global business sample that responded positively to the same question.
The results come from E&Y's Global Capital Confidence Barometer, a biannual survey of senior executives from large companies worldwide. The latest survey was taken in July and August.
Oil and gas transaction activity showed signs of a rebound in the third quarter over second-quarter 2011, yet recent activity still greatly lagged the volume and value of oil and gas deals experienced at yearend 2010.
Kinder Morgan's planned $21.1 billion acquisition of El Paso Corp. got the fourth quarter off to a strong start.
Overall, the oil and gas industry expressed greater corporate confidence in the economic outlook than did other industries surveyed for the E&Y Capital Confidence Barometer.
When asked about anticipated investments by region, oil and gas companies said they are most likely to invest in the Asia Pacific, followed by North America, Middle East and Africa, Western Europe, and Latin America.
Cash, equity to finance deals
Jon McCarter, E&Y oil and gas transactions leader, said 50% of oil and gas respondents plan to use cash and equity to finance deals rather than using debt. That compares with 25% of the broader business community that told E&Y they plan to finance deals using cash and equity.
"In the wake of the collapse in 2008, oil and gas companies worked hard to reduce financial risks and work more efficiently," McCarter said. "Consequently, we are seeing stronger balance sheets, lower costs, and an increased focus on investments, making growth possible."
US gas production is at its highest level in almost 40 years. Sustained investment and drilling activity, along with technology advances, have started to pay off. However, the US Department of Energy forecast modest demand growth continuing into 2012.
"Many companies have learned to adapt and operate in a new and uncertain world," E&Y said of the oil and gas industry. "They are well positioned to seize opportunities and plan to do so, as many have reduced their financial risk and have the ability to take on more business risk."
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