Oil and gas sectors get energy boost as investment returns

Aberdeen-based Wood Group is one of the companies who found opportunities in adversity

Andy Brogan, global oil and gas transaction advisory leader for accountancy firm Ernst & Young, predicted that "a number" of initial public offerings (IPOs) are planned for this year and, if the fundraising plans by floating companies are successful there will be further investor interest in the sector.

But investment is likely to focus on larger, more diversified firms while smaller oil and gas explorers with a handful of assets won't see the benefit. He said "lessons have been learned" from the risks of investing in small explorers.

Brogan said that companies listing on the stock market this year will have larger portfolios than their predecessors, with assets spread across both exploration and production.

Brogan said: "Lessons have been learned regarding the risks of investing in single asset pure exploration companies and we anticipate that companies successfully coming to market will have larger portfolios, probably spread from exploration into production.

"Commodity pricing volatility is likely in the short term as global demand is predicted to remain below supply capacity in 2010. As economic recovery drives demand growth, greater pricing stability is expected in the medium term, although the precise timing and shape of recovery remains a subject of much speculation."

Brogan's hopes for the industry came as Shell and Malaysia's Petronas yesterday signed a deal to develop Iraq's Majnoon oilfield, one of the world's biggest.

Shell and Petronas won the rights in an auction held in December for the 12.6 billion barrel field in southern Iraq.

Brogan made his predictions as part of E&Y's third annual global oil and gas transactions review, which is published today.

Upstream oil and gas firms were the winners in a choppy mergers and acquisitions market, said the report, which noted 837 deals globally in 2009 compared to 1,152 in 2008, with upstream deals accounting for 72 per cent.

But the total value of oil and gas transactions rose by 10 per cent year-on-year to $198bn (122bn), reflecting the improving capital market conditions and growing consensus on oil price outlook.

While deal activity "plunged" in the oil field services (OFS) sector, the report said companies with war chests – such as Aberdeen-based Wood Group – found opportunities in adversity.

Alec Carstairs, oil and gas partner at Ernst & Young in Scotland, said: "The evaporation of equity and difficulties in debt funding, as well as the impact of lower oil prices – down on average from $96.87 in 2008 to $61.54 in 2009 – and cutbacks from operators were the chief causes for the slump in transaction levels.

"However, buyers who were active in this phase have strong balance sheets and have taken advantage of others' distress to complete opportunistic bolt-on deals." The 553m sale of Edinburgh consultancy and research provider Wood Mackenzie was also important as it showed mainstream equity houses were still keen to increase their oil and gas exposure.