Commodities_Energy

Since mid-2014, the transaction market in the oil and gas sector has been stalled by a dramatic plunge in oil prices, according to EY’s 2014 Canadian oil and gas transactions review. With current prices and market conditions, EY says few new oil or gas projects globally appear to be economical, and the Canadian industry is not immune.

Read: Banks yet to feel oil crash’s effects

“A structural shift is underway in the oil and gas business,” says Barry Munro, EY’s Canadian Oil & Gas leader. “The industry is transitioning from a ‘resource scarcity’ model to a ‘resource abundance’ model.”

For the Canadian industry, three key implications result from this structural shift:

  • Costs matter. In a “resource abundance” world, future commodity prices will not preserve or rescue high-cost projects as the industry grapples with structural cost pressures. There will be winners and losers – those able to adapt and those who fail to adjust.
  • Globalization. The global nature of the industry means increased unconventional production is challenging old-market dynamics. Capital continues to flow to projects with little regard for borders, while players continue to evolve strategies and structures in ways to best address and succeed in the global energy marketplace.
  • Innovation. Innovation will continue to be critical to realizing the massive resource potential of the Canadian industry.

“Once the current market shock has worn off, we expect that 2015 will see a continuation of 2014’s portfolio rationalization efforts,” says Munro.

Read: Commodity index plunges to recessionary lows

In Canada, EY expects transactions in 2015 to be driven by a variety of factors, including the need for incremental cash to fund other operations or shareholder requirements, to remove non-core assets to streamline operations and reduce costs, to continue repositioning the business and, increasingly, to address balance sheet necessities.

“Capital preservation will be a key theme in 2015,” adds Munro. “We expect current market challenges to create unique opportunities for well-positioned and well-financed companies. Unlike during the financial crisis in 2008-09 when transaction activity effectively ceased, we believe transactions will accelerate through the later parts of 2015.”

Read: Alberta’s economy to decline by 1.5%

Originally published on Advisor.ca

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