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M&A ticks over despite credit worries

ENERGY sector mergers and acquisitions (M&A) activity remains robust, despite instability in world financial markets caused by the credit crisis. The number of deals in the second quarter of 2008 was down on the same period in 2007, according to US broker John S Herold (JSH). But, as has been the case for the past three years, the second-quarter figure represented a sharp rise from the first-quarter total.

North American asset deal prices continued to rise – reaching almost their highest level for five years, although they lagged behind the meteoric increase in commodities prices. North American deal value in the second quarter amounted to $16.72bn, which, JSH says, implies a proved reserves value of $20.13 per barrel of oil equivalent.

According to JSH, total upstream deal values reached $25.58bn in the second quarter, compared with $19.75bn in the first quarter. This is less than half the $53.44bn generated by upstream deals in second-quarter 2007, although last year's figures were inflated by Rosneft's $6.8bn bid for the Siberian assets of Yukos.

In recent months, M&A activity has been particularly intense among medium-sized exploration and production companies. US onshore shale-gas plays remained the hot focus; XTO Energy was involved in three large asset transactions, with a combined value of $2.9bn, in the Appalachia Marcellus shale, the Arkansas Fayetteville shale and the Rockies Bakken shale.

Canada's oil sands are also experiencing an intense rate of asset transfer: in June, Occidental Petroleum, announced the purchase of a 15% stake in the Joslyn oil-sands project in Northern Alberta from Enerplus Resources Fund, for $492m. This deal marked Oxy's return to the oil sands after an eight-year absence.

The US still accounts for about half of all global M&A transactions. But activity is on the rise in other regions. Upstream deal value in Africa and the Middle East rose to $2.3bn compared with just $0.658bn in the second quarter, says JSH. Asia-Pacific's eight deals in the quarter saw $4bn change hands, up from $0.776bn in the previous quarter. While in Europe, deal volume was boosted by ConocoPhillips' agreement to sell its Dutch North Sea gas operations to local utility Nuon for $0.75bn in cash.

Three hostile bids were made in the second quarter: ROC Oil launched a cash and shares offer for fellow Australian E&P company Anzon; Endeavour International offered to acquire Canadian-owned, UK North Sea-focused Ithaca Energy – although the formed has pulled out of its $363m bid; and BG Group bid $13bn for Australia's Origin Energy (see p18). In addition, Russia-focused UK explorer Imperial Energy was approached by India's ONGC in July as a possible take-over play.

Meanwhile, national oil companies remained eager to expand their presence through M&A and that looks likely to continue for the rest of the year. China Oilfield Services, a unit of China National Offshore Oil Corporation, announced a $2.5bn bid for Awilco, a Norwegian drilling contractor, while the UAE's Taqa bought six oilfields in the North Sea, from Shell and ExxonMobil (the financial details were not disclosed). Other Chinese companies remained acquisitive, with Sinochem buying the Yemen assets of Soco, another London-listed oil firm.

Activity in the downstream segment, one of the busiest areas of the market last year, is limited, partly because of the economic downturn and partly because of political obstacles. For example, Austrian OMV's proposed purchase of Hungarian rival Mol – which would involve the take-over of two Mol refineries in Hungary and Slovakia – has been challenged by the European Commission on competition grounds.

But M&A in the European gas and power sector is more active. In early July, Italy's Eni signed a deal with French utility Suez to buy more than 57% of its Belgian gas trading arm, Distrigas, in a €2.7bn cash deal. The sale is expected to close this year, subject to European Commission approval. The $108bn merger of Gaz de France and Suez was also completed last month.

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