Outlook for oil and gas sector remains positive for 2010

David Barringer, Ernst & Young's Oil & Gas Leader in the Middle East, says that the oil and gas sector is likely to fare better than most in the year ahead, given the sustained demand for oil.

"Larger companies in the sector, supported by stronger oil prices and more robust balance sheets, are on the lookout for opportunities to expand their asset base. I believe that more consolidation in the sector is inevitable as larger companies take advantage of the strategic opportunities presented by their junior counterparts."

Barringer says that a number of IPOs are planned for 2010 and, if successful, it is likely that there will be increasing investor interest in the sector. "More consolidation in the sector is inevitable as larger companies take advantage of strategic opportunities," he adds.

M&A activity building

Andy Brogan, Ernst & Young's global oil and gas transaction advisory leader, says: It is clear that optimism is slowly returning to the market, with 837 deals announced worldwide in 2009. "The positive trends that we have seen in recent months are likely to continue into 2010 and the outlook for oil and gas transactions is healthy in upstream and oilfield services. In the downstream sub-sector, over-capacity in some regions is likely to drive a longer period of uncertainty and transactional challenges. But as 2009 has demonstrated, one person's challenge represents another's opportunity. Although the volume of deals was down by 24% compared to 2008, the total value of oil and gas transactions was up by 10% to $198b."

Tough times for refiners

The downstream sector remains under pressure. Refiners are likely to continue to be squeezed by upward crude price pressures and very limited demand pressures. At the same time, refining expansions, planned during times of high demand growth and strong economics, are coming online - implying weak margins over the next few years. Depressed spreads are further punishing complex and sophisticated refiners.

"Over capacity in refining will be the biggest issue facing integrated oil and gas companies, both globally and - particularly - in Asia," adds Brogan. "We are seeing a massive modernization and expansion of the Chinese refining system, which includes closing numerous smaller, inefficient simple plants and replacing them with newer, larger, complex refineries that are more able to process heavier, more sour and acidic crude oil. This will further depress margins for other refiners, who are already struggling."

Short-term outlook

Despite some uncertainty with regard to the strength of the economic recovery and the shape and impact of forthcoming policy decisions, Barringer is confident that the oil and gas industry will be able to sustain its recovery. "The oil price has strengthened, equity capital is starting to flow back into the sector, development projects are coming back on stream with increasing frequency, and stronger exploration budgets are being set. These all suggest increasing activity in an industry that has more experience than most of managing volatility and which tends to run on a considerably longer investment horizon," he concludes.