Oil and gas sector merger appetite chokes on oil glut

As the oil price falls, so does appetite for mergers and acquisitions in the oil and gas sector.

However, executives in the oil and gas sector are optimistic on the global economy, a recent survey of executives by consultancy EY shows; 94% of the 100 executives in the oil and gas sector worldwide say they expect the global economy to either improve or remain stable over the next year.

But the number of executives in the oil and gas sector who expect their company to actively pursue acquisitions over the next 12 months has fallen sharply and stands in sharp contrast to executives in other sectors, who are much more optimistic.

Oil and Gas Sector Mergers

Oil and gas sector mergers appetite drops. Source: EY

Growth has become less of a focus for companies in the oil and gas sector, who now prefer to focus more on cutting costs and increasing efficiency.

Oil and Gas Sector Cost Cuts

For the oil and gas sector, cost cutting is in sharper focus. Source: EY

In addition, about 76% of executives said that less than 25% of their growth for the current fiscal year was explicitly assigned to acquisitions.

Companies do look towards taking on more risk, but they prefer to do so by changing the mix of products and services, divesting non-core units and strengthening and expanding their core and complementary businesses.

They do this with the help of sophisticated transactions such as asset swaps, spinoffs and joint ventures.

Despite the falling price of oil, companies in the oil and gas sector are planning to add more staff. More than half of executives, about 54%, expect to create jobs or hire new people, compared with just 37% in a similar survey in April.

The number of executives who said their companies planned to cut their workforce dropped to just 5%, from 14% six months ago.

Not all is lost on the mergers and acquisitions front, either. Pip McCrostie, EY global vice chair for transaction advisory services, notes that the deal pipeline has increased by “a remarkable 30%” since April.

“In addition, two-thirds of executives expect M&A pipelines to expand further over the next year — more than double the number expecting expansion six months ago,” she said in a note accompanying the release of the survey results.

When it comes to risks, geopolitics is top of the list for oil and gas company executives, just as it is for executives in the technology sector and elsewhere.

Increased global political instability was picked as the biggest economic risk to their business by 53% of the oil and gas sector executives.

This was followed by the effects of the tapering of quantitative easing with 21%, slowing growth in key emerging markets with 12%, the pace of the structural reforms in the eurozone with 7%, inflation with 6% and deflation with 1%.

The number of executives who are confident on corporate earnings has more than doubled compared with last year.

Confidence in credit availability and short-term market stability also increased sharply among oil and gas sector executives.


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