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M&A: Number of transactions hits record, but total value falls

OIL AND gas sector mergers and acquisitions (M&A) set new records in 2007 and market conditions remain conducive for another robust year of corporate activity, say John S Herold and Harrison Lovegrove. According to a study carried out annually by the two consultancies, the number of upstream deals rose by 30% in 2007 to over 240 – a record level. More than 90% of the transactions were in the sub-$1bn segment and nearly 75% occurred in North America. The value of asset transactions globally also reached a new high, rising by nearly 40% to $89bn in 2007.

Overall, however, there was a modest decline in total transaction value in upstream M&A from $166bn in 2006 to $154bn in 2007. This was caused by a 32% fall to $65bn in the value of larger corporate transactions, with no deals greater than $10bn being transacted for the first time since 2004. But while there were no very large deals, the study reported a surge in the $5bn-10bn segment of the market, with an increase in total deal value from $5bn in 2006 to nearly $34bn in 2007 – representing more than half of total corporate deal value in 2007.

Conditions for further M&A activity this year remain strong, say Christine Juneau, Herold's chief operating officer, and Martin Lovegrove, vice-chairman of oil and gas at Standard Chartered Bank, which owns Harrison Lovegrove. "With access to resources remaining restricted and organic reserves-replacement costs on the rise, this year companies will continue to look to grow" through M&A, they say.

"The asset market will remain highly competitive in the most sought-after areas with increasing competition now coming also from the sovereign wealth funds, particularly those in the Middle East, which entered the market with vigour for the first time in 2007." In addition to mergers to achieve scale, corporate consolidation may occur to improve efficiencies within companies, although this will probably happen "in any significant" way only if oil prices were to fall for a sustained period to below $80 a barrel, they say.

The fall in the corporate-deals segment does not necessarily indicate that the appetite for deals is weakening fundamentally, although high share prices, buoyed by inflated commodity prices, may have discouraged acquisitions, says Chris Sheehan, director of M&A research at John S Herold. "We did see a pull-back in corporate deal value, but we do see further corporate consolidation on the horizon, particularly if commodity prices decline," he says. "We still feel that it will be a very robust M&A market."

National oil companies (NOCs) and sovereign wealth funds, such as Abu Dhabi's Taqa, are adding a new competitive dimension to the market. Total transaction value by NOCs slipped from its record high set in 2006, but still accounted for around $43bn, or 29%, of total worldwide deal value during 2007, says the report. Total transaction value for NOCs outside their home countries was about $13bn in 2007, the same level as 2006.

Meanwhile, although the review finds that deal pricing last year was down from the "frothy highs" of 2006, pricing remains buoyant. Following consecutive record levels in both 2005 and 2006, worldwide weighted average deal pricing for proved reserves fell by 22% in 2007 to $9.99 per barrel of oil equivalent (boe).

Implied proved reserve values in North America declined by 7% to $16.57/boe, but there was a fall of 44% outside North America, to $5.05/boe, "dampened significantly" by low dollar-per-boe transactions in the former Soviet Union (FSU), primarily from the Russian government auction of former Yukos assets to state-owned companies. Excluding FSU deals, worldwide weighted average and median proved reserves deal pricing held roughly flat with the previous year, the review says.


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