Mining, oil and gas facing tough times across Africa

More oil and gas companies are expected to succumb to stress, which will drive transactions in 2016, after global deal volume and value fell short of expectations in 2015, dropping by 33% and 17% respectively year-on-year. EY’s Global Oil and Gas Transactions Review 2015 finds deal volume was down in nearly all sub-sectors in 2015 compared to 2014, most notably in oilfield services (OFS), where deal activity decreased by almost 40% from 320 to 193, and in upstream where deal volume dropped from 1,467 in 2014 to 910 in 2015 – a 38% decline. Deal value was similarly depressed across most sub-sectors, with OFS leading the pack with a 63% decline from 2014. Total value did, however, increase by 57% in the downstream sector following a number of sizeable transactions involving refining assets in the US.hideAndy Brogan, EY global oil and gas transaction advisory services leader, said: “Declining crude prices coupled with an uncertain outlook challenged transactions in 2015. Now, with greater consensus around a ‘lower for longer’ outlook shrinking the valuation gap between buyers and sellers, we’ll likely see more deals come together this year. “Companies that have shown resilience amid $40 to $50 per barrel oil [prices] are beginning to face insurmountable distress as the price sinks below $40. All the signs point to a more opportunistic market for merger and acquisition (M&A) activity.” Meanwhile, financial distress among mining and metals companies will lead to M&A activity in the sector in 2016, with divestments expected to pick up pace on the back of volatility and uncertainty on the timing of a recovery, according to another new EY report. The report – Mergers, acquisitions and capital raising in mining and metals: 2015 trends and 2016 outlook – notes that after the fifth consecutive year of declining deal volume and values, increasing levels of financial distress will trigger more divestments, spinoffs, joint ventures and possibly hostile takeover bids. The report warns that with a glut of assets, scarcity of capital, selective buyers and market conditions forcing accelerated sales, getting divestment processes right will be paramount to achieving a sale for even the best quality assets. Lee Downham, EY global mining and metals transactions advisory leader, said: “A company’s positioning on the cost curve is critical in the current market conditions, so presenting robust information to potential buyers is pivotal to provide confidence that cost reduction and productivity measures are sustainable. “Similarly, anticipating transaction risks such as separation and regulatory and joint venture approvals take on greater importance in this market. Prospective buyers are thin on the ground and they will reduce valuation, or even walk away, if these issues aren’t adequately addressed.” Global mining and metals deal volume sank in 2015 to the lowest level since at least 2000, with just 358 deals completed. Mr Downham said: “Perhaps the greatest concern within the industry is that nobody is sure how long the current downturn is going to persist and companies cannot sit back and wait for an improvement in market conditions. “This is forcing many corporates to downsize portfolios and be pragmatic on valuation, which in turn will create deal activity.”

Mining, oil and gas facing tough times across Africa

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