Integrated oil companies may target emerging markets, finds annual E&Y oil and gas review.

In a review of Global Oil & Gas Transactions in 2011, Andy Brogan, global oil and gas transactions leader at Ernst & Young, says that 2011 was “in a word, difficult” for M&A activity in the downstream oil sector. “The big driver of downstream M&A activity is the move by independent oil companies (IOCs) to rebalance their portfolios as part of a continued drive towards increased capital efficiency,” he says.

“This trend has accelerated a little bit as the US and Europe went ex-growth
in terms of fuel demand.”

Brogan notes that European refiners are also struggling due to an elderly refining fleet that was built for a much more gasoline-orientated market and the fact that the ability to export gasoline to the US has fallen away. Brogan says that 75% of EU refiners saw negative cash flow in 3Q11.

There are a lot of assets in mature markets for sale and these are either not optimally configured or separated from the global market and/or tied to an inland market with low growth prospects, Brogan adds. In contrast, most transactions are for assets with either coastal access to global markets or those exposed to a particularly attractive inland market.

The announcement by the EU to suspend imports of Iranian crude is expected to have a short-term impact, says Brogan, given that it takes place on fairly generous payment terms and refiners – particularly those in southern Europe – will have to adapt to 30-day payment periods instead of the 90-day basis seen with Iran.

On the topic of whether the trend for IOCs to shift away from downstream integration will continue, Brogan says they will rationalise where possible, but at the same time they will be willing to spend money in emerging markets. However, IOCs are likely to focus “on doing less but better”.

Brogan says that when you look at the combined margins for integrated companies they appear to be very stable, compared with pure play upstream or downstream companies. He says IOCs have certain advantages in terms of risk and capital. “As we move to a world in which capital is hard to come by, we could see the return of integration,” he says.

The Global Oil & Gas Transaction Review 2011 states there were 103 transactions in the global downstream sector in 2011, down 16% from 2010. The disclosed value of the transactions was US$38 billion, compared with the US$40 billion seen in 2010. The top 10 transactions accounted for 71% of the total declared value, with two of the largest being Berkshire Hathaway’s acquisition of Lubrizol Corp. for US$8.9 billion and Ashland Inc.’s acquisition of International Specialty Products Inc. for US$3.2 billion. 48% of all transactions took place in North America, with Europe and Asia accounting for a further 24%.