Funding problems in North Sea oil and gas could lead to more takeovers

Mar 06, 2009 01:00 AM

by John Penman

Oil and gas companies in the North Sea could become increasingly vulnerable to takeover as they face greater funding challenges, according to a report by Ernst & Young.
For the first time in five years, no new oil and gas companies have listed on AIM in a quarterly period, highlighting the distress in the sector and reflecting a worldwide slowdown in initial public offerings in the second half of 2008. E&Y's Oil and Gas Eye index -- a quarterly index that tracks the fortunes of oil and gas companies on AIM -- reports that a lack of both equity and debt is continuing to upset the market, with only £ 23.6 mm raised by just 42 oil and gas juniors in the final quarter of 2008, compared with £ 229 mm in the previous quarter and £ 325 mm a year ago.

According to the latest Oil and Gas Eye index, this worrying trend is continuing into 2009 with just £ 1.19 mm raised by the sector in January.
"This is a stark continuation of the slowdown in capital raising now being witnessed in the sector," says Alec Carstairs, oil and gas partner at Ernst & Young.

Distressed companies have now become a driving force behind acquisitions, with transaction activity providing eleventh-hour rescues for some oil and gas companies. Aberdeen-based Dana Petroleum snapped up distressed Canadian rival Bow Valley Energy but Ernst & Young warns that North Sea oil companies could become the hunted as well as the hunters as North Sea production declines, creating a bigger liquidity gap between players.
Following on from a record 52 % fall in the Ernst & Young index in the last quarter of 2008, it was down by just 4 % by mid-quarter of 2009, suggesting the market may be bottoming out, but Ernst & Young doesn't expect a substantial rebound in the short term.

"The industry as a whole is in a stronger shape than in previous downturns and is better placed to deal with challenges," said Carstairs.
"Although oil prices have fallen sharply from recent peaks, they remain above long-term averages. However,the timing of a full recovery will depend on the speed of recovery in the US and other economies."

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