37% of oil and gas companies pursue divestments amid capital constraints: Ernst & Young

Competitive environment and critical buyers create new challenges for sellers

CALGARY, Feb. 11, 2013 /CNW/ - Growing pressures around cost and access to capital are setting the stage for a dynamic year of transaction activity in Canada's oil and gas industry, with divestments taking on a greater strategic role, according to Ernst & Young.

"Getting access to capital at a fair price is top of mind for oil and gas companies — and it's playing a big role in their decision making," says Barry Munro, Ernst & Young's Canadian Oil and Gas leader. "Leading companies are taking a much more thoughtful approach to portfolio management, divesting assets not aligned with their strategic goals and refocusing on those best positioned to create shareholder value."

Ernst & Young's 2012 Global corporate divestment study shows 17% of global oil and gas respondents are currently in the process of shedding assets, and 20% plan to do the same over the next two years.

"While oil and gas companies' desire to unload assets is growing, the conditions for completing these transactions remain challenging," says Munro. "Companies are facing a much more competitive selling environment, and 45% of our global oil and gas respondents reported an increase in the level of buyer scrutiny."

Munro says that means sellers must challenge themselves to undertake thorough preparation and improve how they market their assets to the "right" potential suitors. For 39% of oil and gas respondents, enhancing value to market means tailoring the divestment information to potential buyers.

Canadian oil and gas companies can maximize their divestment success by adopting and executing on these five leading global practices: 

  • Conduct structured and regular portfolio management: Companies that regularly divest of non-core assets through structured processes are more likely to achieve their strategic goals.

  • Consider the full range of potential buyers: Appealing to a full range of buyers, including strategic and financial, domestic and overseas, can create strong interest for an asset and realize a price that meets expectations. An upfront and thorough analysis of who may be a buyer and why is key.

  • Articulate a compelling value and growth story for each buyer: Buyers are more circumspect about the growth potential of businesses being offered for sale, yet few sellers articulate a strong value and growth story. In the oil and gas business, telling a plausible development story for a resource play when capital is constrained is challenging.

  • Prepare rigorously for the divestment process: Select changes to the preparation process can make a material difference to value. Examples include protocols for information sharing and confidentiality, engagement with target management and investment by senior team members. Timing is critical to a successful process — the buyer's diligence process is not the time a seller should discover issues about their assets that may adversely impact value.

  • Understand the importance of separation planning: Buyers that do not fully understand factors influencing separation planning perceive greater risk, which is often reflected in their offering price. Successful sellers address these perceptions upfront and present a credible and detailed plan.

"Whether companies are just trying to survive or whether they're in search of capital to pursue new opportunities, understanding the factors that maximize divestment success is crucial," says Munro. "Concentrating on these factors can improve buyer confidence, increase value, reduce disruption and accelerate the sales process. By better managing risk, companies can increase the likelihood of transaction success in all market conditions."

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SOURCE: Ernst & Young

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