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Upstream mergers revive after moribund first quarter

THE GLOBAL upstream sector is witnessing a revival in mergers and acquisitions (M&A) activity. The number of deals in second-quarter 2009 nearly doubled from the previous quarter – rising from 30 to 58 because of a rise in oil prices and more active equity and credit markets, according to IHS Herold, a consultancy.

M&A activity fell to a 10-year low in the first three months of the year, as the recession frightened buyers out of the market. But although North American activity remains well below historical averages, the international deal count has since increased significantly.

Deal count was helped by low equity valuations in North America. "International pricing for proved-plus-probable reserves held firm on stronger oil prices, but falling natural gas prices plunged North American asset deal prices to the lowest level since 2005," says IHS Herold's director of M&A research, Chris Sheehan. He adds that while the second-quarter upsurge is encouraging, the market remains volatile.

IHS Herold reported that total transaction value in the second quarter increased four-fold outside North America compared with the first quarter, mainly because of strong activity in the Africa/Middle East region and upturns in Europe and Asia-Pacific. But total deal value in the second quarter, at $28.4bn, was unchanged compared with the first quarter because of the $20bn Suncor/Petro-Canada merger.

National oil companies (NOCs) accounted for nearly 40% of global deal value, including Sinopec's $8.8bn agreement to acquire Addax Petroleum, the largest ever overseas upstream transaction by a Chinese company. Addax, which has Iraqi assets, is not the only Middle East-focused player to have been targeted. The UK's Heritage Oil is buying Turkey's Genel Enerji, which is set to become the largest oil producer in the Kurdistan region of Iraq, for $6bn. The deal should be completed in the third quarter.

Asian companies have featured prominently in the transactions that have been done. Three of the 10-biggest energy deals in the period involved Chinese buyers and three involved Russia's Gazprom. That trend was also identified by a July report by PricewaterhouseCoopers (PWC), a consultancy. It said oil companies from emerging economies have been responsible for more than half of the sector's biggest M&A deals by value this year. Emerging market buyers paid $24.2bn of the total $48bn value of the 50 largest oil and gas deals agreed in the second quarter, according to PWC.

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