Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • CapitaLand Limited
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • Nishimura & Asahi (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Mannheimer Swartling (Stockholm)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Global

Promoting Long-Term Value Creation – The Launch of the Investor Stewardship Group (ISG) and ISG’s Framework for U.S. Stewardship and Governance

Editors’ Note: This article was co-authored by Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles and Sara J. Lewis of Wachtell, Lipton, Rosen & Katz.


Executive Summary/Highlights:

A long-running, two-year effort by the senior corporate governance heads of major U.S. investors to develop the first stewardship code for the U.S. market culminated today in the launch of the Investor Stewardship Group (ISG) and ISG’s associated Framework for U.S. Stewardship and Governance. Investor co-founders and signatories include U.S. Asset Managers (BlackRock; MFS; State Street Global Advisors; TIAA Investments; T. Rowe Price; Vanguard; ValueAct Capital; Wellington Management); U.S. Asset Owners (CalSTRS; Florida State Board of Administration (SBA); Washington State Investment Board); and non-U.S. Asset Owners/Managers (GIC Private Limited (Singapore’s Sovereign Wealth Fund); Legal and General Investment Management; MN Netherlands; PGGM; Royal Bank of Canada (Asset Management)).

Focused explicitly on combating short-termism, providing a “framework for promoting long-term value creation for U.S. companies and the broader U.S. economy” and promoting “responsible” engagement, the principles are designed to be independent of proxy advisory firm guidelines and may help disintermediate the proxy advisory firms, traditional activist hedge funds and short-term pressures from dictating corporate governance and corporate strategy.

Importantly, the ISG Framework would operate to hold investors, and not just public companies, to a higher standard, rejecting the scorched-earth activist pressure tactics to which public companies have often been subject, and instead requiring investors to “address and attempt to resolve differences with companies in a constructive and pragmatic manner.” In addition, the ISG Framework emphasizes that asset managers and owners are responsible to their ultimate long-term beneficiaries, especially the millions of individual investors whose retirement and long-term savings are held by these funds, and that proxy voting and engagement guidelines of investors should be designed to protect the interests of these long-term clients and beneficiaries. While the ISG Framework is not intended to be prescriptive or comprehensive in nature, with companies and investors being free to apply it in a manner they deem appropriate, it is intended to provide guidance and clarity as to the expectations that an increasingly large number of investors will have not only of public companies, but also of each other.

Click here to read the full article.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

The Dutch Corporate Governance Code and The New Paradigm

Editors’ Note: This article was co-authored by Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles and Sara J. Lewis of Wachtell, Lipton, Rosen & Katz.

Executive Summary/Highlights:

The new Dutch Corporate Governance Code, issued December 8, 2016, provides an interesting analog to The New Paradigm, A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, issued September 2, 2016, by the International Business Council of the World Economic Forum. The new Dutch Code is applicable to the typical two-tier Dutch company with a management board and a supervisory board. The similarities between the Dutch Code and the New Paradigm demonstrate that the principles of The New Paradigm, which are to a large extent based on the U.S. and U.K. corporate governance structure with single-tier boards, are relevant and readily adaptable to the European two-tier board structure.

Both the New Paradigm and the Dutch Code fundamentally envision a company as a long-term alliance between its shareholders and other stakeholders. They are both based on the notions that a company should and will be effectively managed for long-term growth and increased value, pursue thoughtful ESG and CSR policies, be transparent, be appropriately responsive to shareholder interests and engage with shareholders and other stakeholders.

Like The New Paradigm, the Dutch Code is fundamentally designed to promote long-term growth and value creation. The management board is tasked with achieving this goal and the supervisory board is tasked with monitoring the management board’s efforts to achieve it.

Click here to read the full article.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

U.S. UPDATE – The Long Arm of Governance Activism: U.S. Investors Look Abroad

Editors’ Note: This article was co-authored by Adam O. Emmerich and Sabastian V. Niles of Wachtell, Lipton, Rosen & Katz

Executive Summary: U.S. public pension funds – longstanding proponents of corporate governance and shareholder proposal-style activism in the U.S. – are now allocating increasing amounts of capital throughout the world, and increasingly considering whether and how to globally apply their strategies and tactics for increasing shareholder power, changing governance norms, influencing boards and management teams and driving the adoption of their preferred best practices.  Companies in all markets must accordingly study and prepare for changing governance expectations that may be suggested to them, as the long arm of U.S. governance activism is extended globally.

MAIN ARTICLE

As U.S. public pension funds – longstanding proponents of corporate governance and shareholder proposal-style activism in the U.S. – and other U.S. investors allocate capital throughout the world, they are increasingly considering whether and how to apply their strategies and tactics for increasing shareholder power, changing governance norms, influencing boards and management teams and driving the adoption of their preferred best practices across the full global footprint of their investments.  This phenomenon is illustrated by the ambitious plans of CalPERs, America’s biggest public pension fund, to extend their U.S. “focus list” of targeted companies globally and drive changes worldwide in investor rights, board membership and diversity, executive compensation and corporate reporting of business strategy, capital deployment and environmental, social, and governance practices.  CalPERs’ Investment Committee and Global Governance Policy Ad Hoc Subcommittee formally consider these matters later this week.

CalPERs experimented in 2015 with this new brand of global governance activism by selecting a particular non-U.S. market – Japan – to target.  Notably, one of the reasons cited by CalPERs for choosing Japan is the marked increase in foreign ownership of Japanese shares relative to the mid-1990s.  In fact, this phenomenon of companies having to confront a rapidly changing investor base increasingly populated by U.S. investors is by no means confined to Japan.  The measures applied by CalPERs to their selected Japanese companies would be familiar to U.S. companies: (1) correspond with the company; (2) seek in-person meetings with executive management; (3) seek in-person meetings with board members; (4) advocate that specific governance changes be adopted; (5) vote their shares, potentially against incumbent board members or otherwise in opposition to board and management recommendations; and (6) escalate their efforts if desired changes are not enacted.  While not, so far, deploying more aggressive tactics such as “naming and shaming,” leaks to the press, use of the media or other pressure and publicity tactics, CalPERs has been actively engaging with influential organizations in Japan throughout the process.  Examples of topics raised by CalPERs in these very early rounds of engagement in Japan include: increasing board independence, quality and diversity; defining narrower independence standards for directors; director biographies, skill-sets and expertise and disclosure thereof; changing director search and recruitment processes; and seeking comprehensive disclosure of cross-shareholdings.

Other U.S. investors that are well-known governance activists will increasingly adopt the same approach of engaging with non-U.S. companies directly, including at the senior executive and board level.  This is occurring in parallel with the globalization of hedge fund economic activism and the proxy advisory firms seeking revenue opportunities in non-U.S. markets, as illustrated by ISS recently expanding its coverage, staffing, voting recommendations and governance assessments beyond the Americas, further into Australia, Europe and Japan and newly into China, India and South Korea.

On the governance front, these dynamics will require companies in all markets to, at a minimum: (1) carefully evaluate the demands of U.S. corporate governance activists and deal effectively with their requests for meetings; (2) consider changes that will actually improve governance and create sustainable value; (3) resist changes that they believe will not be constructive; and (4) study the approaches that have been developed by U.S. companies, investment bankers and law firms to deal effectively with activists.  As the long arm of U.S. governance activism is extended globally, we encourage investors and proxy advisory firms to avoid imposing one-size-fits-all approaches across jurisdictions; consider local norms, customs and country- and company-specific circumstances (and accept those where appropriate); and in all cases engage constructively and pragmatically.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Global Update – Capital Insights: Oil and Gas

Editors’ Note: Franny Yao (Yao Fang), who contributed this article, is a Partner & Leader at Ernst & Young in Beijing, responsible for Key Accounts and Government Relations in China. She is a founding director of XBMA and has broad expertise in cross-border M&A, representing major Chinese companies in their global expansion and other strategic drives. This article comes to us from Ernst & Young’s Capital Insights. 

Highlights:

  • Increased demand, high oil prices and steady production have increased sector confidence, but challenges lie ahead.
  • Managing return on capital invested is a major issue for the industry, despite high prices and rising demand.
  • Corporates need to keep focused on upstream core assets to increase returns.
  • Partnerships, investment in new technology and a focus on quality, as well as scale of production, are fundamentals for the future success of the industry.

Main Article:

The oil and gas sector is changing. Capital Insights explores how corporates are seeking growth by consolidating and innovating.

At first glance, oil and gas companies seem to be doing better than ever. Production is running at near record levels. According to the BP Statistical Review of World Energy 2013, the world produced 86.1b barrels of oil in 2012 — a 15% increase on total production 10 years ago.

At the same time, oil prices have averaged a historically high level of US$111 per barrel for the past two years, according to the US Energy Information Administration (EIA). A decade ago, oil was priced at just US$25 a barrel. The high pricing is a result of growing demand. According to BP, consumption increased to a record high of 89.7 billion barrels last year, a 14% increase on the 78.4 billion barrels consumed in 2002. Strong growth in emerging markets (EM) has driven the increase, with a rise in consumption of 3.3% in countries that are not members of the Organization for Economic Co-operation and Development (OECD).

Oil and gas executives have taken heart from this backdrop of increasing demand, high oil prices and steady production. “For the bulk of the last decade, we have been in an environment where oil prices were rising quite quickly and gas prices were either flat or rising,” says Andy Brogan, Global Oil & Gas Transactions Leader at EY. “Fields that came on stream when prices were still low are economical at those lower prices and are still producing. When the oil price is trading above those levels, the energy companies are making money, and that underpins confidence.”

This is shown by EY’s latest Capital Confidence Barometer, in which 58% of respondents were focused on growth — up from 41% in October 2012.

This underlying industry confidence supported a record year for M&A in 2012.

According to EY’s Global Oil and Gas Transactions Review 2012, deals worth US$402b were closed in the oil & gas sector last year, significantly higher than the US$337b in 2011. There were 92 transactions exceeding US$1b in 2012, compared with 71 in 2011, a further sign of confidence as corporates demonstrated a willingness to invest large sums in long-term projects. Major deals include the acquisition by CNOOC Ltd, a China National Offshore Oil Corporation subsidiary, of offshore group Nexen for US$15.1b.

Despite a falloff in M&A activity in 2013 (as there has been in many sectors due to continued economic uncertainty — for more, see “The big picture”) and a cautious approach to additional investment by corporates, there have still been substantial deals. These include US company Freeport-McMoran Copper & Gold buying offshore driller Plains Exploration and Production for US$10.8b in May, while in April, US company Hess sold its Russian assets to the country’s second-largest oil producer, Lukoil, for US$2b.

“The industry has been blessed with quite a long period of relative stability with the commodity price at reasonably strong levels,” says Jon Clark, UK Leader for Oil & Gas Transaction Advisory Services at EY. “That has helped to build balance sheets in larger companies, but it has also made people feel more comfortable about making long-term capital commitments and investment decisions.”

Capital constraints

However, despite the positives, the industry faces challenges. Managing return on capital is one of the major issues with which the industry has been confronted, even in an environment where prices and demand have stayed high.

A May 2013 Citigroup study, Investing for Commodity Uncertainty, found that the return on capital employed for 30 of the world’s largest oil companies fell to 9% in 2012. Between 2005 and 2008, figures show that return on capital averaged over 15%. That return could drop to 8% by 2015, if Brent crude prices fall below the US$100-per-barrel threshold.

“There is no doubt that it is more costly to produce resources today than it was 20 years ago,” says Kevin Forbes, Partner at specialist oil and gas technology investor Epi-V. “There is a huge cost differential between a relatively simple drilling operation in Saudi Arabia and drilling under 10,000 feet of water in a deep-water project.”

Finding new sources

Discovering and producing reserves in more hostile conditions has been one of the major contributing factors to the pressure on return on capital.

Government-backed national oil companies (NOCs) now control the bulk of the world’s oilfields — according to the BP Statistical Review, countries outside of the OECD now control 85% of the world’s proven reserves. A recent example of the growing strength of NOCs can be seen in China’s CNPC acquiring a 20% stake in Offshore Area 4 in Mozambique from Italy’s Eni for US$4.2b in July 2013. International oil companies, which used to control more than four-fifths of global reserves before the rise of NOCs, have had to look to difficult-to-access, deep-water assets and unconventional sources of energy, such as oil locked in shale and tar sands.

For example, in September this year, US company Ensco took delivery of an ultra-deep-water drilling ship, ENSCO-DS7, which is set to become its fourth rig working in the West Africa deep-water market.

A 2013 Goldman Sachs analysis of Europe’s largest oil and gas companies demonstrates how challenging it has been for some groups to improve return on capital when the sites are so difficult and technical. The investment bank found that 18% of the capital invested by Europe’s largest oil and gas companies has gone on projects that need the oil price to be US$80 or higher just to break even.

 Table

 Making the most of it

Even though unconventional and deep-water oil and gas assets are pricier and more challenging to develop, exploiting these resources is essential if the world is to continue meeting the mounting demand for hydrocarbons.

According to the International Energy Agency (IEA), the development of deep-water reserves, oil sands and shale gas is forecast to increase production from outside OPEC to 53 million barrels a day by 2015, up from fewer than 49 million barrels a day in 2011. By 2035, the IEA forecasts that unconventional gas will account for half the increase in global gas production.

Unconventional resources have become key for oil companies, as they provide access to new reserves that are not controlled by the dominant NOCs. Many of these projects can be operated profitably thanks to improvements in technology, and supplies are plentiful. The EIA estimates that the world holds reserves of 345 billion barrels of technically recoverable shale oil and 7,299 trillion cubic feet of shale gas.

This is a significant source of new assets for international oil companies, easing pressure to replace reserves.

“The shale plays have made a very significant contribution to our business. These assets … provide tremendous optionality for ConocoPhillips,” said Matt Fox, Executive Vice President of Exploration and Production at US oil group ConocoPhillips, in its 2012 annual report. “They are resource rich, with years of scalable drilling inventory.”

Brogan adds that another advantage of unconventional resources is that they provide oil companies with greater capital flexibility than plays in deep-water or traditional wells. “If you are in huge offshore assets operated by a consortium, [this] usually means that you are in assets that have very long lead times and very little flexibility about the capital you deploy once you have made the decision to go. Unconventionals are a good alternative to that, because you can scale those up and down quickly,” says Brogan.

The only way is upstream

The focus on return on capital among the oil companies, coupled with moves to make plays for deepwater and unconventional assets, have been the major drivers of oil and gas M&A recently. These priorities mean that the largest growth in investment is in upstream assets (operations involving exploration and production stages), where deal value increased by 68% to US$284b, according to EY’s Global Oil and Gas Transactions Review 2012.

Upstream deals have continued to dominate deal activity in 2013, with Royal Dutch Shell’s US$6.7b buyout of Repsol’s liquefied natural gas (LNG) assets one of the standout deals of the year. Activity in the downstream market (operations that take place after production through to retail), by contrast, has been slower, with downstream deal volumes falling 6% to 162 deals in 2012, and deal values staying flat at around US$42b.

Oil companies have been eager to sell off downstream operations and focus on potentially more lucrative upstream plays. Examples from 2012 include Exxon Mobil selling its Japanese retail, refining and storage division, TonenGeneral Sekiyu, for US$3.9b, Statoil selling a 54% stake in its road-transport fuel retailer to Alimentation Couche-Tard, and BP selling its Carson refinery and Southern California refining and marketing business to Tesoro Corporation. Meanwhile, in September 2013, US oil company Chevron agreed to sell its downstream assets in Pakistan.

“Downstream assets tend to have a lower unlevered return than upstream assets, so you have seen companies selling those assets or, at the most extreme end, completely splitting downstream and upstream,” says Brogan.

Picture

The road ahead

In a changing world, corporates in the oil and gas sector need to bear in mind the following factors when trying to compete:

1. Return on capital. Although the oil price is trading at near-record highs and demand is increasing, return on capital is still a key area of focus as resources become more difficult and expensive to produce. “As the rocks that companies are producing oil from become progressively harder to get at or are more remote, and the focus on health, safety and environmental concerns becomes even greater, then the cost of developing them increases. Processes have become more technical and difficult. Deep-water is more expensive than shallow-water, and unconventional resources are more expensive than conventional,” says Brogan.

2. Partner up. Partnerships have always played a large part in the industry, but the fact that many oil and gas fields have become more technically challenging to operate and require large capital investment has prompted an increase in joint ventures (JV) and strategic alliances between oil and gas companies to mitigate risk.

“We are now entering a third era, where cooperation between partners is the key to unlocking the resources found in the most challenging locations,” said BP Chairman Carl-Henric Svanberg in the company’s latest annual report.

A recent example of this is the JV deal announced in June 2013, between Pangean Energy and PetroTech Oil and Gas, which saw the companies enter a contract to buy mineral rights in the huge Bakken shale oil reserves in North Dakota.

3. Upstream deals. The record M&A level in 2012 — particularly in upstream activity —

demonstrates the importance of using acquisitions as a tool for breaking into new geographies and taking control of unconventional resources such as shale or deep-water. And, while 2013 has been quieter for M&A, there is reason for optimism. The second quarter of 2013 saw an improvement in upstream deals — although it was a modest one. According to Derrick Petroleum Services, volumes rose from 117 deals in Q1 to 141 in Q2, with value also rising from US$20.9b to US$24.9b. The indication is that the sector is still focusing on its core activities.

Upstream deals are extremely key to positioning oil companies to achieve the best return on capital. “In an environment where capital is more constrained than in the past, companies have rightly focused on where they can get the best returns on that capital. Traditionally, the upstream segment of the market is where bigger returns on capital are possible,” says Clark.

4. Invest in technology. Advances in technology have been the key enabler for companies developing difficult-to-reach assets. Without technological developments, production on many assets operating today would be impossible. This is set to be an ongoing theme — investing in technology, either internally or through acquisitions, will allow companies to produce with greater efficiency and open up new resources in the future.

“Oil companies are making returns on capital on difficult assets, which they could never have made economical 20 years ago,” says Forbes. “Given the recent technological breakthroughs, there is every chance the industry can continue to open up hard-to-access reserves in the future.”

5. Quality not quantity. Producing as much as possible used to be the main focus for international oil companies. Now, with the focus on return on capital, quality, as well as scale of production, is the priority. “For BP, advantage now comes from exceptional capability rather than exceptional scale. Our future is about high-margin, high-quality production, not simply volume,” said BP’s Svanberg in the annual report.  Indeed, technical ability and high margins are likely to remain crucial, as oil companies rely more on deep-water and unconventional reserves to replace oil stocks and meet the world’s ever-increasing energy needs.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Global Update – M&A Outlook: Global Deal Volumes And Appetite Expected To Improve

Editors’ Note: Franny Yao (Yao Fang), who contributed this article, is a Partner & Leader at Ernst & Young in Beijing, responsible for Key Accounts and Government Relations in China. She is a founding director of XBMA and has broad expertise in cross-border M&A, representing major Chinese companies in their global expansion and other strategic drives.

Executive Summary:  There is a strong consensus global M&A volumes will increase as confidence in the overall economy climbs. Below are the results of Ernst & Young’s Capital Confidence Barometer April 2013 – October 2013.  The Global Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU).

Main Article:

Global deal volumes and appetite expected to improve

There is a strong consensus global M&A volumes will increase as confidence in the overall economy climbs. In total, 72% of companies expect global deal volumes to improve over the next 12 months.

Twenty-nine percent of respondents expect their company will pursue one or more acquisitions in the next 12 months.

What is your expectation for global M&A/deal volumes in the next 12 months?

Global deal Volumes

53% expect to do deals between US$51 million in the next 12 months, up from 46% from October 2012.

The improvement in acquisition plans (29%) is largely driven by an increasing number, and a higher quality, of acquisition opportunities. Thirty-nine percent of companies say there are quality acquisition opportunities available, compared with 30% six months ago; 50% feel more confident about the number of opportunities available, versus only 37% six months ago.

Bias toward smaller deals as conservatism persists

Consistent with sentiment over the past six months, deals are likely to remain smaller in size despite record amounts of available cash and improving credit conditions. In total, 88% of respondents planning acquisitions expect deals to be under US$500 million. The pursuit of smaller transactions aligns with companies’ overall strategy toward organic growth and lower-risk sentiment.

Valuations increasing

Expectations for increased valuations are now at their highest level in the history of our Barometer: 44% of companies expect prices/valuations to rise in the next year, up from 31% in October 2012. Just 7% of companies expect valuations to decline, compared with 27% six months ago, suggesting the market has stabilized.

Most respondents (82%) say the valuation gap is 20% or less, compared with 68% in October 2012. However, while valuation gaps are narrowing, this trend is not expected to continue over the next year, as 79% of respondents expect the gap to widen or stay the same.

Deals to span developed and emerging markets

Investment destinations continue to evolve as companies challenge their growth strategies and underlying risk tolerance. The top five countries include both emerging and developed markets: China, India, Brazil, the United States and Canada.

This is a shift from six months ago, when the US ranked second behind China, and Germany rounded out the top five instead of this year’s new entrant, Canada.

Companies remain optimistic about deals in emerging markets but are exercising more caution. In light of slowing growth, almost 70% of respondents have changed their approach to investing in these markets, of those, 45% say they will apply “further rigor.”

Divesting for value

Divestments are now an established tool for creating shareholder value. In total, 29% of respondents* either have a divestment in progress or are planning one in the next 12 months, and nearly half expect to divest in the next two years. A steady stream of divestments will provide capital to fuel growth in the future.

In total, 83% of the companies planning divestments expect that those divestments will involve the carve-out of one or more business units. These transactions — whether structured as an outright sale, spinoff, IPO or contribution to a joint venture — are highly complex and will require companies to employ formal and rigorous processes around divestment.

Viewpoint

A possible inflection point in asset valuations

A contributing cause to the ongoing slowdown in deal-making is a perceived gap in asset valuations between buyers and sellers. Companies pursuing divestments are seeking high valuations for their assets, while potential buyers are primed for discounts and reluctant to pay a premium.

However, we may now be nearing equilibrium between what buyers will pay and what sellers will accept. This equilibrium is vital, signaling the deal markets are at an inflection point and ready to rebound. The pendulum is primed to swing the other way — toward growing prices by buyers and more profitable exits for sellers.

This also suggests a comeback in market fundamentals, corporate health and a stable foundation for deal-making.

With 44% of respondents expecting M&A assets to increase in value over the next 12 months (and only 7% anticipating a decrease), companies should consider taking advantage of this inflection point now.

Profile of respondents

  • Panel of almost 1,600 executives surveyed in February and March 2013.
  • Companies from 50 countries
  • Respondents from more than 20 sectors
  • 794 CEO, CFO and other C-level respondents
  • 912 companies would qualify for the Fortune 1000 based on revenue
The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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