Slowdown stares at M&As in oil, gas

Written by Shaheen Mansuri | Mumbai | Updated: Nov 27 2008, 08:42am hrs
The global financial downturn will take a toll on M&A activities in the oil and gas sector say experts.

Experts also say the global crisis will impact availability of funds from the debt and equity market flow into the sector. Further, if the grim financial scenario persists, private equity and hedge funds, who are bearing the brunt of the downturn, may need to do distress sales of their oil and gas assets. Prior to the downturn, investments upto $15 billion were expected in M&A activity in the oil and gas sector in India in the next two years.

Says Dilip Khanna, partner, Ernst & Young, M&A activities are not expected to remain robust in the short-term in the oil and gas sector, as companies are finding it difficult to raise funds from the debt and equity market. Only cash rich companies are expected to follow the inorganic growth route. Currently foreign fund are drying up and equity markets are in no shape to support any fund-raising.

Meanwhile, a recent Ernst and Young report on the, Challenges and opportunities in the upstream oil and gas states that financing capex and working capital is proving to be a severe problem for the countrys oil and gas sector.

The problem is more severe for smaller players, who were previously relying upon private equity firms and hedge funds, says the report. The report also says smaller players need to bring innovative financing options such as equity convertible debt instruments to attract funding for their projects.

An analyst from a Mumbai-based broking firm adds, The price of crude oil has also fallen drastically in the last two months from $147 per barrel to below $70 per barrel. This price volatility has become a major challenge for upstream companies, as it impacts their strategic decision-making and evaluation processes for the execution of new projects.

However, apart from availability of funds in the sector, human capital deficit is another critical challenge. A recent survey conducted by Ernst & Young in collaboration with Rice University in the US confirmed the extent of struggle that companies across the globe have undergone in recent years to recruit, retain and develop a sufficient number of employees.

The industry has not been able to replace its aging professionals with new engineers. Manpower shortages are intrinsic to the industrys boom and bust cycles, and its staffing responses to these cycles have resulted in fewer younger employees and an increasing workforce age profile, reveals the report.