The desire to consolidate core businesses will be the primary driver of oil and gas M&A activity in 2014, according to 56 percent of respondents, followed by access to new technologies (52 percent), geographic growth (35 percent), product and service growth (18 percent), and customer growth (13 percent).
“Companies continue to rebalance their asset exposure, concentrating development resources in liquid rich plays like the Eagle Ford and the Bakken and areas with adequate midstream infrastructure, logistics and market access to support near term profitability and growth,” said Tony Bohnert, KPMG's Energy Sector Lead Partner for Transactions & Restructuring. “We’re also seeing a wave of deepwater M&A activity in the Gulf of Mexico as companies look to boost production as fields mature and further expand geographic and geologic diversity.”
United States Most Active Market
Fifty-seven percent of oil and gas executives expect the United States to experience the highest level of M&A activity in 2014, followed by Western Europe (27 percent), and China (26 percent).
“The perceived safety of the United States, and North America more broadly, continues to attract investment dollars from both U.S. and global companies looking for predictable growth in today’s volatile economic environment,” said Bohnert. “However, as capital continues to flow into the North American market, it is increasingly being allocated to the exploration and development of existing holdings, partly at the expense of M&A activity. We’re also starting to see a drop-off in joint venture activity from foreign investors as national oil companies (NOCs) have quickly advanced their knowledge about how to apply North American fracking techniques and technologies.”
Challenges to Deal Making Persist
When asked about factors that could most adversely affect deal activity in 2014, respondents cited uncertainty in the regulatory environment (38 percent), valuation disparities between buyers and sellers (37 percent), volatile energy prices (36 percent), and the inability to forecast future performance (28 percent).
“Lingering uncertainty around state and federal environmental regulations and local political will around future development remain considerations for companies as they look to emerging plays,” said Bohnert. “In addition, the gap is still wide between what buyers are willing to pay for producing assets and what sellers think they are worth. Many buyers do not see an upside to paying a premium for properties already in production, and instead are setting their sights on early stage assets.”
Financing Smaller Deals to Dominate in 2014
Survey participants indicated there will be very few megadeals in 2014, with middle-market deals dominating M&A in 2014. Fifty-six percent of respondents expect their respective deal activity will be valued under $250 million, followed by 23 percent who anticipate their acquisitions will be valued between $250 and $499 million, and 11 percent between $500 and $999 million.
“Positive economic indicators, such as an abundance of available private equity and financial capital at low interest rates, an expanding economy, and recovering employment figures, point to an attractive M&A market,” said Bohnert. “Although long-term market uncertainty has kept CEOs and CFOs focused on cleaning up their portfolios in recent years rather than exposing their companies to significant risk with large-scale deals, an increasing pursuit for M&A opportunities could be on the horizon.”
About the 2014 M&A Outlook Survey
In collaboration with the Research practice unit of SourceMedia, the publisher of Mergers & Acquisitions, KPMG LLP surveyed 1,001 M&A professionals in September 2013, including 101 oil and gas executives. The population was comprised of investors (70 percent) and advisors (30 percent) from the following industries: technology/media/telecommunications, 15 percent; healthcare/pharmaceuticals/life sciences, 11 percent; energy, 10 percent; financial services, 16 percent; diversified industrials, 18 percent; consumer markets, 12 percent.
A replay of a webcast held on January 16, 2014, where the data was discussed in depth by KPMG leadership, is available on the Advisory Institute page.
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 155,000 professionals, including more than 8,600 partners, in 155 countries.