Special Focus on Independent Oil & Gas


Partners & Members ‘On the Spot’


“What issues are your Independent O&G Clients most concerned with in 2012; and how can they overcome the challenges these issues present?”


Andy Brogan, Global O&G Transactions Advisory Services Leader, Ernst & Young, and Jon Clark, UKI O&G Transactions Advisory Services Leader, Ernst & Young


Last year was marked by global turbulence, with political change, economic upheaval and natural disaster all playing a major part. Clarity has been hard to come by, yet it is clear that security of energy supply and reliance on the oil and gas sector are undiminished. This is reflected in oil prices that have remained robust despite an uncertain economic outlook and an upstream M&A market that, although lower than in recent years, has averaged approximately two to three transactions every day in 2011. A more worrying trend, however, can be seen on a quarterly basis, where deal volumes declined in the second half of 2011.


This reflects growing economic uncertainty during the year, combined with tightening capital markets. Access to debt and equity funding, particularly for the independent sector, is now extremely challenging. The oil and gas sector cannot exist perpetually insulated from wider political and economic turmoil.


These dynamics are driving considerable volatility in the capital markets, and this is likely to have a significant impact on capital intensive sectors such as oil and gas. Improved funding conditions at the start of 2011 were relatively short–lived and, although a window of opportunity is anticipated in mid–2012, it is hard to see everyone being successful in securing the requisite debt or equity funding.


Those with cash constraints are likely to trigger a wave of asset and corporate opportunities. Those at the larger end of the scale with stronger balance sheets may benefit from these. It is these circumstances that lead us to believe that the key issues for 2012 for the independent O&G sector will be around capital raising, capital preservation and capital management.


~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Russell Wells, Partner, Clifford Chance LLP


'Show me the money' – will be the independents' cry for 2012. In a world of weak balance sheets, increasing regulation and general austerity, access to capital is the perpetual spectre at the door of the independent. Whilst the classic options, simply put, of raising equity for discoveries and debt for development, still remain, the sources of this capital, and their overall capacity to provide it, has been greatly diminished.


The economic crisis has led to a much acknowledged decline in liquidity, severely constraining the banks' ability to lend. The crisis has forced banks to refocus their lending priorities, resulting in a reduced appetite for exposure to 'riskier assets' and, in some cases, a degree of retrenchment favouring markets closer to home.


Much has also been made of additional regulatory restraints, born out of the crisis, which will increase the banks' capital requirements. Whilst this will undoubtedly have an impact on bank lending in the midterm, we would suggest that the Basel III legislation should not be blamed for the current restraint in providing debt finance to the oil and gas sector. Rather, the banks will continue to focus their available funds on the high end sponsors, who possess strong management teams, and who hold interests in proven reserves.


Sadly equity capital markets are not an easy touch for making up the debt shortfall, with the IPO and private equity markets suffering from very similar concerns to those felt by their debt counterparts. There were only a limited number of IPOs in the sector during 2011 (with Valleres and Ophir Energy being the more notable exceptions), with many IPOs being pushed back - some indefinitely. The outlook for 2012 is no better. Private equity houses will however remain a strong force within the industry, although they too are affected by the liquidity squeeze.


Against this background, liquidity will more likely be found in M&A activity. The current capital freeze often allows for the well-funded operator to purchase, and realise the potential of, the smaller independent's underfunded


Drillers and Dealers :::


::: February 2012 Edition


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