Investors are returning to the oil and gas sector in response to the need for energy security and as as the industry addresses climate concerns, according a key adviser.

Barry McCaig, partner and head of corporate in Scotland at Pinsent Masons, says the IPO of Ithaca Energy at the end of last year indicated that institutional investors are coming back into oil and gas and that the capital markets are selectively open for quality businesses.

However, his comments come as Make UK, the manufacturing trade body, warns that the unstable political climate at Westminster over the past year has eroded Britain’s appeal to overseas investors.

Make UK says the focus of attention has switched from the impact of Brexit on trade costs to the UK government’s mis-management of the economy since the UK’s departure from the EU.

Mr McCaig says there are grounds for confidence. “Despite the political and economic turmoil that businesses of all shapes and sizes had to navigate in 2022, it was encouraging that deals continued to get over the line,” he says.

“That should continue into the new year and there appears to be a good pipeline of transactions scheduled for Q1 despite continuing market uncertainty and unease about interest rates.

“Although we’ve seen a bit of contraction in the debt markets, there is still a lot of liquidity in the market and money is available for the right deals but there may need to be some readjustment of sell-side expectations, with more focus on the reconfiguration of deals, and greater emphasis on earn-outs and innovative consideration structures.”

He added: “The oil price may cool a little in 2023 but it will stay comparatively high compared to what we have experienced in the last five years, which will encourage deal activity.

“There also remains a good appetite to invest in oil and gas with a broader range of funds coming back into the fold because of three factors – the importance of establishing energy security; the industry appears to be addressing ESG concerns; and the potential returns were much more positive last year compared to many other sectors.”

The price of oil is forecast to climb higher during the second half of this year as tight supply and the full benefit of China loosening Covid restrictions outweigh the impact of global recessions.

Brent crude, the international benchmark, is trading at about $80 a barrel after peaking at $139 a barrel in March last year after Russia invaded Ukraine. Analysts at UBS and Bank of America think that the oil price will peak at $110 a barrel this year, around the level at which it traded last summer, as supply constraints persist.

Make UK’s gloomier report notes “evidence that the political instability of the last 12 months has damaged the competitiveness of the UK as a manufacturing location.”

The number of companies believing the UK to be a competitive location has halved from last year, down to 31% from 63%, according to its research.

The data follows a year which produce three Prime Ministers, four Chancellors and three Business Secretaries.

Its research reveals that 43% believe the UK is now less attractive to foreign investors, while more than half of companies, 53%, believe that political instability is damaging business confidence.

While government supporters will point to a more settled Cabinet under Rishi Sunak, there are worrying indications over future investment intentions. Make UK member companies have turned negative for the first time in two years, although it concedes that increasing energy costs are also a key factor.

The survey of 235 senior executives, done jointly with PwC, the accountant, also found that two-thirds of business owners will be reducing production, headcount, or both, irrespective of the government’s energy support package, which is expected to be extended today.

More than one in ten (11%) said they were thinking about moving production facilities to other countries where energy is cheaper than in the UK.

“A potent mix of factors is testing the resolve of manufacturers,” said Stephen Phipson, chief executive of Make UK.

“Ongoing supply chain disruption, access to labour and high transport costs that show no sign of abating can be added to a growing sense of economic and political uncertainty in their main markets.

“The biggest risk, however, remains the eye-watering increase in energy costs, which has the clock ticking for many companies.”