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Global M&A recovery remains patchy

SIGNS OF an increase in oil and gas mergers and acquisition (M&A) activity emerged in the third quarter of 2009. But the global picture remains patchy and the recovery distinctly fragile.

The quarterly Herold M&A Insights report from IHS Herold, a consultancy, shows a rise in the number of global upstream deals worth over $10m to 79 in the third quarter, sharply up from the 61 deals of second-quarter 2009, and even a little higher than the 68 deals conducted in the same quarter of 2008. Deal values remained depressed, however – third-quarter 2009 deals were valued at $21.36bn, compared with $29.36bn in the previous quarter and $37.69bn in third-quarter 2008.

The cautious optimism is partly the result of growing confidence that economic recovery is under way and a more stable oil price.

"Oil-price volatility has started to calm down, which means people feel assets are more fairly valued," says Raoul LeBlanc, senior director of the financial advisory practice at PFC Energy, a consultancy. Today's situation, with the oil price trading in a fairly narrow range, of around $70-80 a barrel, compares with that in 2008, when prices fluctuated rapidly – reaching a high of nearly $148 a barrel in the summer, before collapsing to under $40/b by the end of the year (see Figure 1, p38). As a result, buyers and sellers found it nearly impossible to reach agreement on the value of assets.

This removes one bottleneck, which should stimulate M&A activity in the coming months. However, with funding still scarce for many firms and the economic outlook still far from clear, privately owned companies are unlikely to become overly acquisitive for the time being.

Canada was one of the most active markets and home to some of the quarter's biggest deals (see Table1). The acquisition by Petrobank Energy and Resources of Tristar Oil and Gas for around $2.5bn led the field, followed by Centrica's purchase of Venture production for $1.75bn. But perhaps the most significant transaction was PetroChina's acquisition of assets from Athabasca Oil Sands for $1.7bn – the largest incursion by a Chinese national oil company (NOC) in the oil-sands sector (PE 10/09 p9).

The Chinese were also active closer to home, with the first sizeable upstream investment by sovereign wealth fund China Investment Corporation, which bought 11% of the global depositary receipts of KazMunaiGaz, Kazakhstan's NOC, for just under $1bn.

Cash-rich Chinese and Indian NOCs, as well as Russian companies, have been far bolder than their western counterparts in striking deals they regard as vital to securing access to strategic reserves, even if the prices asked may seem high, PFC's LeBlanc says.

However, there have been recent setbacks for Chinese NOCs in Africa, where CNOOC and Sinopec's joint bid for Marathon Oil's stake in Angola's deep-water Block 32 was blocked by state-owned Sonangol; and the Libyan government blocked CNOOC's attempted purchase of Libya-focused, Canadian-based Verenex (see p9).

There were few signs of buoyancy in the US, where M&A activity remained flat. The deal count there dropped to 17 in the third quarter from 19 in the previous quarter and was well down on the 31 deals struck in third-quarter 2008. The value of US deals in third-quarter 2009 was around $3.5bn, compared with $12.8bn a year earlier, says IHS Herold.

In the US natural gas sector, depressed M&A activity is largely the result of the sort of price volatility that is no longer a feature in the oil business, LeBlanc says. He also says banks' reassessment of their US energy-sector loan portfolios earlier in the year resulted in fewer bankruptcies than had been expected, which reduced the need for emergency asset sell-offs. But, he says, the banks' leniency towards the US energy sector may not last, raising the possibility that more assets may come to the market.

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