by EY

INDUSTRY DISTRESS WILL FUEL TRANSACTION ACTIVITY AS CRUDE PRICE DIVES
Welcome to our annual review of global oil and gas transaction activity. In this report, we look at significant trends in oil and gas deal activity over 2015 and the outlook for transactions in 2016.
The oil and gas industry is in the midst of a significant structural shift – a move from an era of capital investment decisions driven by the perception of "resource scarcity" to an era of "abundance" when oil and gas reserves seem plentiful.
Excellence in operational and project execution became essential not only to success but to survival. For many, 2015 was a difficult and turbulent time as traditional energy business models had to change in order for companies to survive in a new "resource abundant" world.

UPSTREAM SEES LARGEST DECLINE
2015 tested the oil and gas industry’s threshold for sustained depressed oil and gas prices, driving home the message that capital discipline is critical.
Shell’s pending acquisition of BG Group was the largest upstream acquisition in over five years and accounts for 54% of the 2015 total US$153 billion disclosed upstream deal value. Removing this deal from the total, the number and value of upstream M&A transactions was the lowest in the past five years (909 deals for a total value of US$71 billion, a more than 55% reduction).
We also saw upstream capex cut by a record US$147 billion in 2015, as public and national companies of all sizes moved to preserve precious cash.
Although some of the decline in value from 2014 to 2015 can be attributed to lower commodity prices, data also highlights a steady five-year decline in deal volume. In 2015, just under half the number of deals were disclosed as compared with 2014 volume, and just under a third as compared with 2011.

2015 was a year in transition for upstream M&A, and we see four key themes developing in 2016
  · Continued low M&A value with some recovery in volume - Distressed transactions of higher-quality assets/portfolios will feature as hedges run out, lender covenants tighten, capital commitments loom and the low-price environment depletes cash.
  · Increasingly complex transaction structures - Swaps, strategic alliances and milestone payments may become more common as transaction structures increase in complexity and buyers and sellers look to manage their exposure to commodity price volatility and other future uncertainties.
  · Relentless focus on capital discipline - Large-scale development projects will be reworked, and only transactions with sustainable economic returns will be able to attract large capital investment from both existing and new participants.
  · Fewer megadeals - In 2016, there will likely be fewer transactions valued at US$1 billion+ as valuations drop/reset and because quality opportunities continue to be scarce. We expect to see portfolio optimization transactions and some more sizeable divestment campaigns.

MIDSTREAM RALLIES WITH MEGADEALS
Midstream transaction volumes and disclosed values decreased in 2015. Although reported deal value of US$149.5 billion was down from US$166 billion in 2014, this remains at a historically high level recognizing the record values posted in 2014.
As in prior years, midstream transaction activity, both in volume and value, was dominated by activity in the US and Canada, which accounted for 84% of all deals and about 97% of the global midstream disclosed value.

DOWNSTREAM OUTPERFORMS THE SUBSECTORS
In 2015, there were 142 transactions with a disclosed deal value of US$51.5 billion as compared with 134 transactions with a disclosed deal value of US$29.6 billion in 2014.
The US accounted for nearly half of the downstream transactions, while Asia (including Australia) and Europe accounted for about 25% and 12%, respectively. There were 91 asset transactions and 51 corporate transactions during the year.
Fundamentals driving transaction activity in the downstream sector remain robust, and we expect similar activity levels across the refining and storage terminals subsegments, unless the US starts exporting crude oil in volume, which could see additional demand for storage terminals. The retail subsegment however could see further consolidation in the US and Europe as there is strong interest from various parties for retail marketing networks.

OILFIELD SERVICES COULD SEE CONSOLIDATION IN 2016
2015 has continued the downward trend of transaction activity in the oilfield services sector from a peak of 406 deals in 2013 to 193 deals in 2015, a decline of 52%.
The total disclosed deal value was US$26 billion, over US$10 billion below the average of the preceding five years and a significant US$45 billion decline on 2014. Average disclosed deal values also decreased from US$600 million in 2014 to US$335 million in 2015.
However, both 2014 and 2015 were distorted by pending megamergers — Halliburton and Baker Hughes in 2014 for US$38 billion, and Schlumberger and Cameron in August 2015 for US$15 billion. Excluding both these transactions, total disclosed deal value in 2014 and 2015 would have been US$34 billion and US$11 billion, respectively, a decline of 67% year-on-year.
Average disclosed deal value would have been US$283 million in 2014 and US$150 million in 2015, a decline of 48%.

Several elements will impact OFS in 2016:
  · Increased stress in the sector
Continued distress will create opportunities for larger companies with strong balance sheets and private equity institutions with surplus funds to snap up struggling companies.
  · Valuation gap to reduce as oil prices stabilize
Oil prices are expected to stay lower for longer in 2016, which could potentially signal an uptick in M&A as sellers with lofty price expectations realign and buyers become less opportunistic and more strategic in their view.
  · Joint ventures and strategic alliances
For many companies, strategic partnerships and joint ventures may be the preferred way to mutually benefit from corporate combinations rather than full-blown M&A.
  · Vertical integration to continue
As the industry responds to the challenge presented by lower oil prices, further vertical integration in the sector is likely as companies integrate their product and service offerings for the benefits of the E&P industry.
  · Increased interest in the sector from financial and industrial players
The sector is attracting renewed interest from a wide range of financial players, not only distressed funds as discussed earlier but also private equity firms, family offices and infrastructure funds that have been increasingly active in the sector.
  · Megamergers and follow-on M&A activity
As large oil and gas companies reinvent themselves, become more completive and consolidate, OFS players will need to transact in order to adapt to the continuing transformation in their customer base.

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