More oil and gas companies are expected to succumb to stress in the sector, which will drive transactions this year, after global deal volume and value fell short of expectations in 2015, dropping by 33% and 17% respectively year-on-year, advisory firm EY’s Global oil and gas transactions review 2015 reveals.

The review further stated that deal volume was down in nearly all subsectors in 2015 compared with 2014, most notably in oilfield services (OFS), where deal activity decreased by almost 40% from 320 to 193, and in upstream where deal volume dropped 38% from 1 467 in 2014 to 910 in 2015.

In Africa, total transaction volume and values were at their lowest levels since 2010. The number of upstream deals dropped 33% from 106 to 74, while total deal value dropped by 67% from $10.8-billion in 2014 to $3.6-billion in the year under review.

However, downstream deal activity rose to six, compared with none in 2014.

“The reduced upstream transaction activity was as a result of a number of factors, including relatively high capital expenditure African projects being seen as less economically attractive in the low oil price environment; lower capital spend available to companies for deals or projects; large gaps between buyer and seller deal value expectations; lack of social and regulatory stability in some African countries; and traditional international investors focusing on their projects at home,” EY Africa energy sector leader Claire Lawrie said.

She pointed out that the six downstream transactions were primarily in West and Southern Africa.

“Given the growing interest in the continent, we expect a moderate increase in downstream deal activity during this year,” she added.

EY Global oil & gas transaction advisory services leader Andy Brogan, meanwhile, stated that declining crude prices, coupled with an uncertain outlook, had challenged transactions in 2015.

“Now, with greater consensus around a ‘lower for longer’ outlook shrinking the valuation gap between buyers and sellers, we’ll likely see more deals come together this year.

“Companies that have shown resilience amid $40/bbl to $50/bbl of oil are beginning to face insurmountable distress as the price sinks below $40. All signs point to a more opportunistic market for merger and acquisition activity.”

Upstream companies were pairing their ongoing focus on cost cutting with high grading their portfolios, which could lead to a consolidation of ownership around core assets as companies seek to increase control over their overall capital outlay and increase opportunities to use their operational capability to deliver value.

This consolidation would also cascade into the OFS sector. “Excellence in operational and project execution remains essential – not only to success, but to survival in the global oil and gas sector. The traditional energy business model has been forced to flex to a new ‘resource abundant’ world,” Brogan said.

EY expected consolidation to continue this year, with significant follow-on activity as merged companies are forced to sell businesses following regulatory pressures.