In recent years there has been a dramatic shift in the sources of capital available for the acquisition, development and production of oil and gas assets. New entrants include Private Equity firms, Infrastructure Funds, and other ‘non-traditional buyers’ to the sector. The consequences of new sources of capital are investigated.
A statistical analysis of transactions that have occurred globally in the last 3 years across upstream, midstream and downstream is presented. This paper also considers a case study and discusses key value drivers for both the buyer and seller, as well as their strategic rationale. Finally, observations are provided on the impact that new entrants are having on cost and risk management in the E&P sector.
Traditional capital sources are on the decline as the majors look to rebalance their portfolios and divest of non-core assets. Increased shareholder scrutiny, and the reduction in oil price has also forced the majority of E&P companies to reduce capital budgets. Non-traditional investors, in the form of National Oil Companies "NOCs" (including sovereign wealth funds), and financial investors (such as private equity and infrastructure funds) have emerged the dominant players in the M&A buyer population, due either to their large sovereign cash reserves, or the vast sums raised for investment funds.
Whilst this new capital has been welcomed by the industry, as it helps to support drilling and development activity levels (that otherwise would have been in further decline), it has also brought with it additional considerations for existing operators, joint venture partners, and regulators. These include: reduced technical/project management skills and the ability to adequately assess and manage risk; misaligned corporate strategies; uneducated buyers entering M&A processes; and differing abilities to manage costs.
This paper highlights the challenges faced by the oil and gas sector and the requirements for capability and competency; the impact of the new entrants to the sector and the sector's need to drive a step change in efficiency and performance, not just receive an injection of capital. However the most important consideration is risk appetite, and a company's ability to appropriately assess risk. The investors who develop or acquire the expertise to adequately characterize level of risk exposure, and identify assets commensurate with their internal risk appetite, will be the most successful in the long run.