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Oil and gas M&A booming

MERGER activity in the oil and gas sector is back to similar levels to the boom days of the late 1990s, says PricewaterhouseCoopers (PwC). The consultancy firm says there are four principal reasons for the market's buoyancy: consolidation among medium-sized companies; the increasingly acquisitive nature of national oil companies (NOCs); the boom in the services sector, where the shortage of equipment and personnel is increasing the rationale for mergers; and growth in oil investments by a range of private-equity funds.

Average deal value in the sector rose by 18% in 2006, raising the aggregate mergers and acquisitions (M&A) total by $41bn to $291bn, according to O&G Deals, a new PwC annual report on M&A activity in the sector.

The trend should continue, according to Rick Roberge, head of PwC's US energy-transaction services unit. "In the period ahead, we are likely to see continued momentum in oil and gas deal activity," he says. "The pressure to replace reserves and the structural rationale for consolidation will remain. Consolidation has a long way to run in the independent and medium-size sector of the market, particularly in North America. At the same time, NOCs and private-equity players will be key drivers of deal activity, both in the middle-tier and at the top end of the market."

M&A in the services sector also looks set to remain buoyant after a robust 2006. Last year, there were six deals worth over $1bn each in this segment of the industry, compared with just two in 2005. Total services company deal values rose by 132%, from $5.6bn in 2005 to $12bn in 2006.

Unlike in the M&A frenzy of 1998, today's deals are not being driven principally by oil majors. Medium-sized deals accounted for half of the total increase in deal value. Last year, there was a 59% increase in medium-sized deal numbers and a 61% increase in medium-sized deal value, from $36.3bn in 2005 to $58.3bn in 2006.

NOCs have also been active in M&A, especially companies from Russia, China and India. And private-equity players, leveraged buyout funds and hedge funds have "begun to move into the oil and gas sector in a significant way", PwC says.

Gas deals dominated the list of the largest transactions in 2006, with six out of the eight upstream deals in the top-10 deal list. The previous year, just two deals in the top 10 of all deals and four of the top 10 of upstream deals had been weighted towards natural gas.

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