Junior players in the oil and gas industry are bouncing back after a fraught spell and benefiting from a cautious recovery in investor confidence, according to a new report.
The study, published by professional service firm Ernst and Young (E&Y), shows a majority of Alternative Investment Market (Aim)-listed firms in the sector saw their shares rise in value during the third quarter of 2009.
E&Y’s Oil and Gas Eye Index, which monitors the performance of Aim oil and gas companies on a quarterly basis, reveals two-thirds of 109 firms on its list made gains during the three months to September 30.
It marks the third consecutive quarter of growth in the index, contributing to a progressive reversal of substantial declines seen in the closing months of 2008.
The index has risen by 114% since the start of the year and jumped a further 35% during the latest quarter.
Aberdeen-based E&Y oil and gas partner Alec Carstairs said: “Oil company stocks have benefited from the cautious recovery in investor confidence and higher oil prices. Secondary fundraising in the oil and gas sector totalled £333.3million in the third quarter.
“This was the highest amount raised by Aim-listed oil and gas companies in a single quarter since the second quarter of 2006.”
Mr Carstairs said a total of 39 oil and gas companies had raised additional capital on Aim during the third quarter of 2009. He said: “The majority were seeking funds to advance the development of key assets and to bring forward revenues.”
E&Y said one of the ways firms are looking to survive the turbulent times is through mergers and acquisitions. “A new wave of oil and gas transactions is building in the pipeline,” the firm said, adding: “Companies are busy making plans to buy, sell and swap assets to forge alliances and to restructure businesses and portfolios.
“A significant proportion of M&A activity in the oil and gas upstream arena this year has involved independent companies as both buyers and sellers. For many sellers, transactions have been a defensive move out of financial necessity and a desire to preserve shareholder value.”
But E&Y oil and gas director Jon Clark said cash-rich firms were likely to proceed with some caution.
He added: “Transactions in the short term are likely to include joint ventures, involving small to medium-sized corporates and alliances of a strategic or tactical nature.
“We do not expect to see a return to the record deal volumes and values of 2006-07 and the first half of 2008.
“Meanwhile, the carve-outs that followed the mega-mergers of the 1990s will continue as larger companies sell non-strategic business.”
Mr Clark said future deals would be structured in a way that reduces reliance on debt. There was financing available for stronger oil and gas players to “make things happen”. Although there have been no new oil and gas companies listing on the Aim in over a year, E&Y said interest levels in initial public offerings (IPOs) were greater now than for some time.
It added: “This interest has been triggered by increasing market stability and a return of investor risk appetite, manifesting itself in an increase in funds flow to equity funds. With the pipeline of IPO candidates continuing to build, competition will be fierce.”