The mood is more optimistic than in recent times
Discipline on costs and spending is being maintained
69% of oil and gas executives intend to pursue acquisitions in the next 12 months
The upstream sector will continue to see the highest number and value of deals
There are signs of growing interest in sustainable investing
- Optimistic mood. As we enter 2018, the mood is more optimistic than in recent times, although many statements of optimism are still prefaced by words of caution. Healthier balance sheets will prompt more questions around shareholder distributions. A couple of companies have already committed to end their scrip program and restart share buybacks. There will be pressure on other companies to follow suit.
- Capital spending. Discipline on costs and spending is being maintained despite the more supportive market fundamentals. Capital spending guidance was one of the main themes of 2017, and is expected to be featured among the top three themes in 2018. The modest increases in capital spending planned for this year will bring little relief for oilfield services companies, fueling yet more consolidation activity in the stressed sector.
- Project pipeline. Portfolio optimization is expected to be another major theme in 2018. This is backed by the results of our 17th Oil and Gas Global Capital Confidence Barometer — a survey of oil and gas executives, which showed that 69% intend to pursue acquisitions in the next 12 months. With major projects sanctioned prior to the oil price drop now becoming operational, the focus may shift to replenishing the project pipeline.
- Focused on numbers. The upstream sector will continue to see the highest number and value of deals. However, we could see integrated companies looking to establish a presence in high-growth retail markets. Advanced data analytics and digital technologies have the potential to transform the relationship with the retail customer from one that is purely transactional. Companies are developing insights and targeted offers, based on data received from the thousands of visitors to their service stations each day. Getting closer to the customer could be an effective strategy as the traditional boundaries between industries continue to blur.
Out with the old and in with the new could describe not only the start of a new year but also a shift in oil and gas M&A strategy. Last year’s deals focused on lowering costs and portfolio simplification. This year, it will include growth opportunities to restock the project pipeline. Oil companies steadied the ship but need to transition from survival mode to refocus on growth.
- Sustainability. Last year we pinpointed climate-related financial disclosure as an emerging theme, but it never broke into the top-10 rankings in 2017. However, as 2017 drew to a close, there were signs of growing interest in sustainable investing. One oil major announced plans to start reporting on the effects of climate change on the company’s business after a shareholder vote calling for action. And the World Bank announced that it will no longer finance upstream oil and gas after 2019 as part of its efforts to support countries to meet their Paris Agreement goals.
Each quarter, you can find the top themes emerging from oil and gas company earnings calls at ey.com/oilandgas/quarterlytrends. Look out for these reports through 2018 to see if the themes we have identified for this year materialize.
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