The total deal transactions in the upstream sector of the Oil and Gas industry in Africa in terms of volume and value in 2015 were at their lowest levels since 2010, according to Ernst & Young’s Global oil and gas transactions review 2015 .
In volume and value, the total deals in the upstream sector dropped by 33 and 67 percent respectively.
The review which covers Nigeria and other oil producing African countries but which was not specific on any country, said the total deal in term of volume dropped from 106 to 74 and value dropped by 67% from US$10.8 billion to US$3.6 billion.
Claire Lawrie, Africa Energy Sector Lead at EY, says:“The reduced upstream transaction activity was due to a number of factors, such as relatively high capex, African projects being seen as less economically attractive in the low oil price environment; lower capital spend available to companies for deals or projects; large gaps between buyer and seller deal value expectations; lack of social and regulatory stability in some African countries; and traditional international investors focusing on their projects at home.”
Andy Brogan, EY Global Oil & Gas Transaction Advisory Services Leader, says: “Declining crude prices coupled with an uncertain outlook, challenged transactions in 2015. Now, with greater consensus around a ‘lower for longer’ outlook shrinking the valuation gap between buyers and sellers, we’ll likely see more deals come together this year. Companies that have shown resilience amid US$40 to US$50 per barrel of oil, are beginning to face insurmountable distress as the price sinks below US$40. All signs point to a more opportunistic market for M&A activity.”
Ernst & Young’s has however predicted that the situation would be worse in 2016 as many of the oil and gas companies are expected to succumb to stress in the sector, which will drive transactions this year, after global deal volume and value fell short of expectations in 2015, dropping by 33% and 17% respectively year-on-year.
But other industry analysts say Nigeria must have suffered most from the drop since it is the largest producing country and has been in paralysis since 2010 in terms of investment because of government’s inability to resolve issues around the Petroleum Industry Bill which is one reason the international oil companies are not investing in the country.
However, upstream companies are pairing their ongoing focus on cost cutting and upgrading their portfolios. This may lead to a consolidation of ownership around core assets, as companies seek to increase control over their overall capital outlay and maximise opportunities to use their operational capability to deliver value. That consolidation will also cascade into the OFS sector.
Contrary to drops in the upstream oil and gas African transactions, the downstream deals saw an uptick in activity with six deals recorded, compared to no recordings for 2014.
“The six downstream transactions in Africa during 2015 were a marked increase from the prior year. These transactions were primarily in West and Southern Africa. Given the growing interest in the continent, we expect a moderate increase in downstream deal activity during 2016,” adds Lawrie.
Olusola Bello & Peter Olowa
