Post on 30-Apr-2020
EY GCA Conference
May 20, 2015
Preparing for a new battleground in the global oil and gas market
Section 1
Low oil price
environment: the
changing tides of the
transaction battleground
Winners and losers of the oil price decline
2
► Advanced economies ► Oil driven economies
► Airline companies: research suggest that the current
decline in oil price could boost the airline industry by
$10bn (source: FXstreet)
► Commodity traders who will benefit from volatility
► Consumers benefit from increasing purchase power
Winners Losers
► Upstream companies operating at the margin
► Oil field services and equipment suppliers
► EPC providers to major capex projects as a result of
capex deferral – between $100bn and $129bn
(Rystad/Morgan Stanley) over the next two or so
years
Upstream M&A fell off a cliff at the beginning of 2015 before rebounding with Shell/BG deal
3
Q1 2015 deal value and deal count lowest since 2008.
Only 16 deals with $100+ million deal value in Q1 2015, compared to 54 in Q1 2014.
Source: 1Derrick, EY
Shell/BG
Deal
up to May
1,710 2,214 2,083 1,753 1,376 215
0
20
40
60
80
100
120
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 Q1 2015 Q2 2015
US$/BBL Deal value (US$ billion) Total upstream deal value
Oil price (Brent US$/BBL)
Shell/BG
Deal
Upstream
deals (#) 84
(up to May)
How long will it take the sector to rebound from a down cycle this time?
4 Source: 1Derrick
Impetus for increased M&A activity:
Deal momentum from Shell/BG merger? Fallout of recent mega mergers? Distressed M&A?
- 20 40 60 80 100 120 140
0
5
10
15
20
25
30Ja
n
Fe
b
Ma
r
Apr
Ma
y
Ju
n
Ju
l
Aug
Sep
Oct
Nov
Dec
Ja
n
Feb
Ma
r
Apr
Ma
y
Ju
n
Ju
l
Aug
Sep
Oct
Nov
Dec
US$/bbl US$bn
- 20 40 60 80 100 120 140
0
5
10
15
20
25
30
Ja
n
Fe
b
Ma
r
Apr
Ma
y
Ju
n
Ju
l
Aug
Sep
Oct
No
v
De
c
Ja
n
Feb
Ma
r
Apr
Ma
y
Ju
n
Ju
l
Aug
Sep
Oct
No
v
De
c
US$/bbl US$bn
2008 2009
2014 2015
US$18bn Suncor –
Petro-Canada
merger US$41bn Exxon – XTO
US$13bn
Repsol -
Talisman US$82bn Shell offer for BG
Total
deal
value
Total
deal
value
Section 2
Low oil price
environment: who has
the best arsenal to
succeed?
To win the war, be prepared to fight these battles
6
Battle #1
► Different types of
players with
different costs of
capital create an
uneven playing
field
► Those with
relatively lower
cost of capital
have a clear
advantage and
will leverage that
to win
Battle #2 Battle #4 Battle #3
► Structuring to
unlock value of
tax pools
► Structuring to
manage
abandonment risk
► Structuring to
partner with
NOCs in emerging
economics
► Obtaining
government
approval
► Government
intervention
► Pre-emption rights
► Corporate taxation
► Sellers under
pressure to divest
flooding market
with assets on
sale
► Buyers under time
pressure to move
quickly to capture
opportunities in
the market
Leveraging
cost of
capital
Creative
transaction
structuring
Engaging
with the
State
Doing
deals
under
pressure
The competitive landscape isn’t what it used to be
7
► Strategy to remain competitive in a changing landscape,
including implementing innovative methods to lower cost of
capital
► Refresh capital structure to build resilience and flexibility
► Understand your relative position as compared with your
peers
Battle Plan
► Sources of capital flowing into groups with quality credit
ratings
► Preference by those with capital toward high quality
producing assets and well-understood, price resilient
developments
► IOCs able to raise cheap debt, some at negative margins
► Independents with large portfolios of marginal assets are
being crowded out of the market
► Marginal and questionable returns plays stalled due to
inability to attract capital
► Non-traditional players with different risk appetite entering
the market: PEs, distressed funds, private debt lenders,
utility companies
Dynamics of Market Participants IOCs
Upstream
Market
Independents
Vu
ltu
re
Fu
nd
s
Battle #1
Leveraging
cost of
capital
The oil price decline has magnified the difference in cost of capital between major and independent oil companies
8
Before oil price decline (January 2014) After oil price decline (January 2015)
Exxon Mobil Shell
ChevronTotalBPEni
Joint Stock
Tullow OilPremier Oil
Afren
EnQuest
0
500
1000
1500
2000
2500
3000
0 50000 100000 150000 200000 250000 300000
Spr
ead
(bps
)
EV (£m)
Exxon Mobil Shell
Chevron
Total
BP
EniJoint Stock
Tullow Oil
Premier Oil
Afren
EnQuest
0
500
1000
1500
2000
2500
3000
0 50000 100000 150000 200000 250000 300000
Spr
ead
(bps
)
EV (£m)
Sp
read
vs E
nte
rpri
se V
alu
e
Net
Deb
t / E
V
Majors oil companies
12%
Independent oil
companies
34%
Majors oil companies
13%
Independent oil
companies
55%
Independent companies
Major oil companies Independent companies
Major oil companies
Battle #1
Leveraging
cost of
capital
Afren Tullow Oil
EnQuest
Premier Oil
Join Stock
How is the current environment affecting transaction structures?
Battle #2
Creative
transaction
structuring
► Potential for accelerated
decommissioning a more ‘real’
possibility and attracting increased
scrutiny
► Assignment of risk between transacting
parties increasingly at the forefront of
negotiations
► Greater risk being factored into value
and commercial negotiations; leading to
stalled or, worse, failed deals
Manage abandonment risk Access value of tax pool Invest in Emerging Markets NOCs
► Deep understanding and realistic
forecast of decommissioning liability –
both extent and timeline
► Engagement with core stakeholders
► Optimal funding of liability
Battle Plan
► Significant value locked up in
existing tax pools
► Can tax paying companies be
paired with companies with tax
losses?
► Opportunity for innovative
financing leveraging tax
attributes
► Deep understanding of tax laws
and incentives available
► Proper structuring to capture
value
Battle Plan
► Cash constrained NOCs in Emerging
Markets looking for funding options to
participate in their resource development
► Potential for equity investment structure to
replace traditional debt capital raise
► Possible structures explored include: i)
acquiring a stake in NOC, ii) strategic JV
with NOC across all assets, iii) farm into
interest in select NOC assets
► Solid relationship with the decision makers
at NOCs to spot opportunities
► Negotiation/structuring to protect interest
► Fair risk-return allocation
Battle Plan
North Sea Emerging Markets
Evolving trends as the result of the current oil price environment
Already a shake up and a new lesson
to learn (or reminder?) for governments
Even stronger competition among
countries for investments
Increasing pressure coming from the industry
to revise fiscal frameworks
Possibly more leverage for investors in
negotiations with governments
New licensing rounds could be
strongly affected (timing may
become uncertain, both fiscal and
non-fiscal terms may need to be
relaxed)
New incentives or adjustments to tax
regimes may be required to ensure important affected
projects remain economically
viable
Will the current situation change
countries’ attitude to their fiscal
regimes to make them sustainable
and flexible as any robust fiscal
regime for oil and gas should be?
In case of further decrease in oil
prices governments could face renegotiation
claims from investors
Battle #3
Engaging
with the
State
Countries’ responses so far Major recent changes triggered by the new oil price environment
Russia Exploring optimal approaches to change the existing oil and gas regime
UK Significant changes including reduced headline corporate tax rate from 62% to 50% and new ‘investment allowance’ aimed at supporting the industry
Kazakhstan Decrease in export duty (royalty-like) from US$11/bbl to US$8/bbl, discussions on further modifications to the tax regime aimed at increasing its sustainability
Argentina In response to the significant drop in oil prices the export tax (royalty-like) has been modified (twice) to significantly decrease the duty rate
Colombia Incentives to support interest in offshore opportunities (special 15% corporate income tax (general is 25%) and special customs terms
China Increase in price threshold for the windfall tax (from US$55/bbl. to US$65/bbl.)
Mexico Revision of IRR thresholds for the Round One PSCs
(increase by 5%)
No particular tightening of upstream tax terms observed (e.g. as a response to revenue pressures due to oil price decline). Countries are still evaluating their regimes, with pressure from the industry increasing.
Battle #3
Engaging
with the
State
Both buyers and sellers are facing pressure to transact
12
► of oil and gas companies say that shareholder
activism influenced their most recent decision
to divest
► of oil and gas companies reinvested the funds
raised from most recent divestment in their
core business
► Recent mega mergers triggering forced
divestments
► of oil and gas companies divesting to meet
financial obligations
Sellers under pressure
► Portfolio review and optimisation to develop effective
divestment strategy
► Optimal transaction process to achieve divestment objectives
► Balancing between competing priorities: value maximization,
required timeframe, commercial terms
► Wide network to facilitate conversations with the right
counterparty is crucial
► Disciplined execution by the right people to ensure transaction
success
Battle Plan
► Market flooded with assets, both the good and the bad
► Buyers under time pressure to act or risk “missing the boat”
Buyers under pressure
► Robust asset assessment framework to identify and pursue the
“right asset” to enhance current portfolio
► Deep technical know-how combined with market insight to
quickly evaluate opportunities and craft pursuit strategy
► Be prepared with a war chest of deal structuring, tax structuring
and financing options
Battle Plan
43%
38%
2
?
Battle #4
Source: 2015 EY Global Corporate Divestment Study
Doing
deals
under
pressure
In summary, a new landscape requires a fresh new strategy
13
Whether you’re attacking or defending, a clear effective strategy is crucial to ensure you emerge as the victor.
Don’t under-estimate the importance of preparation.
Arm yourselves with the right people and resources to ensure success.
Leveraging
cost of
capital
Creative
transaction
structuring
Engaging
with the
State
Doing
deals
under
pressure
EY | Assurance | Tax | Transactions | Advisory
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